Written by Asi de Silva CFA | July 24, 2024
Over the past few weeks, the markets have been unusually active.
It has been a while since we've seen such volatility.
What caused this movement? A potential stock market rotation.
Several of our clients also noticed this and reached out to us with questions.
Understanding what's happening and its potential impact is beneficial, no matter your level of investment involvement.
Let's start with the basics.
What is a market rotation?
In simple terms, a market rotation is when market preferences shift from one type of investment to another.
Some general examples include:
- From stocks to bonds
- From growth stocks to conservative stocks
- From technology stocks to financial stocks
To be considered a true rotation, the shift needs to be significant, at least 10% in one direction.
What has been happening over the past two weeks?
We've noticed a shift from large domestic technology stocks to small-cap companies.
Small-cap stocks surged by over 11% in the past two weeks.
Similar shifts have been observed from top technology companies to other large domestic stocks.
Is this bad for my investment portfolio?
Not necessarily. It can be positive if you adjust your allocation properly.
If you've been actively managing your investments, you should be prepared for the continuation of this rotation.
However, if you haven't rebalanced, your investment performance could be negatively impacted.
What should I do about it?
If you are a client of Capital Squared, you don’t need to do anything. We will adjust your allocation per your investment policy with us.
If you are not a client, consider reaching out to your financial advisor to discuss the implications for your portfolio.
Some people can rebalance their portfolios, but handling complex situations like market rotations is not advisable for non-professional investors.
I’m in retirement and my money is invested conservatively. Will this market rotation impact me?
Potentially. One reason for the latest rotation is the expectation of declining interest rates as early as September.
In addition to impacting stocks, interest rates can also affect your bond investments.
Depending on your bond investments, now is a good time to review this portion of your portfolio.