While we are getting a tech rally Wednesday thanks to Advanced Micro Devices (up 7%), this is the month when rotation became more than a one day event. We are going into the last day of the month with the S & P 500 little changed in July, but everything else further down the market capitalization scale having a fine summer: Major indexes in July S & P 500: +0.7% S & P 500 Equal Weight +4.8% Russell 2000 +10% S & P Midcap +5.5% Within the S & P 500, the dispersion among sectors is unusually large, with technology lagging and everything from defensive to cyclicals to commodities all higher. S & P 500 sectors in July Banks +16.1% Real Estate + 6.9% Utilities + 6.1% Industrials + 4.8% Materials + 4.2% Health Care + 2.6% Consumer Staples + 2.0% Energy + 2.0% Technology – 3.3% Communication Services – 4.6% Semiconductor ETF (SMH) – 7.0% When you have sectors like Banks, Energy, Health Care and Consumer Staples up, that usually would signal a strong month for Value, and that is indeed what has happened: Growth vs. Value in July S & P 500 Value + 4.8% S & P 500 Growth – 2.3% Why is this happening? Since small-cap companies often have more debt and higher borrowing costs, the expectation of lower rates is certainly a factor. But valuation plays a part as well. Large cap stocks, particularly tech, have grown their valuations much faster. I noted weeks ago that more fundamentally inclined investors were worried about the slower rate of earnings growth for big cap technology stocks . The Russell 2000 would also benefit any time a rotation out of tech occurs because the weightings are different. While the two sectors that comprise technology in the S & P 500 (Technology and Communication Services) are about 40% of the S & P 500, the Russell 2000 is much more diverse. Russell 2000: sector weightings Industrials 18.8% Health Care 15.0% Financials 15.0% Technology 14.0% Consumer Discretionary 12.7% Energy 7.8% Real Estate 5.8% Other 11.0% Source: FTSE/Russell That means when a true rotation occurs in an environment where rates are expected to decline, small caps can be a beneficiary.
