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Understanding the Big Rotation: A Post-Election Market Shift

December 3, 2020

In the dynamic world of finance, staying attuned to market trends is essential for informed decision-making. This article explores the phenomenon known as the "Big Rotation" and its significant impact on the financial landscape following recent elections.

Shifting Investment Trends

The post-election period has ushered in noteworthy changes in the financial markets, prompting a closer look at what experts refer to as "The Big Rotation.

For nearly two decades, large-cap technology stocks, exemplified by industry titans like Apple, Microsoft, Amazon, and the FANG stocks (Facebook, Amazon, Netflix, Google), have been pivotal in propelling the market forward. However, there is now a discernible shift away from these tech giants toward smaller companies and sectors, particularly in energy and finance. Let's delve into this transformation and consider its implications for investors.

Understanding the Big Rotation

The Great Rotation is characterized by a substantial reallocation of capital away from large-cap tech stocks, including Apple, Amazon, and Microsoft, which have been long-standing market leaders. In contrast, smaller companies and sectors like energy and finance have been gaining momentum. For context, energy stocks had declined by as much as 75%. While they still face challenges, they have seen significant rebounds since November 1st, with energy stocks registering a remarkable 23% increase. Notably, stocks of companies like Chevron have experienced notable gains.

Conversely, tech giants such as Apple, Microsoft, and Amazon have experienced relatively modest gains, ranging from 2% to 8% since November 1st. Simultaneously, small-cap stocks, representing smaller companies, have displayed impressive growth, surging by 17% in just three weeks.

Divergence in Investment Performance

The pronounced disparity between the performance of large-cap tech stocks, which have historically dominated the market, and the emergence of smaller players underscores a significant development that warrants investors' attention.

A contributing factor to this shift is the heightened scrutiny faced by big tech companies. Concerns include allegations of monopolistic practices and issues related to content censorship on platforms like Twitter and Facebook. Additionally, companies like Microsoft and Amazon have encountered regulatory pressures. As regulatory bodies intensify their scrutiny of these tech giants, investors should be mindful of potential impacts on their portfolios.

Emphasizing the Importance of Diversification

This underscores the critical importance of portfolio diversification. If a substantial portion of your investments is concentrated in large-cap tech stocks, particularly through mutual funds, it is prudent to reassess your portfolio. Diversifying into other sectors, such as small-cap stocks and industries like energy and finance, can mitigate risk and enable adaptation to evolving market dynamics.

Current Market Conditions

It is worth noting that the current market appears to be overextended. The Bull-Bear indicator suggests that we are experiencing the second-most bullish market since 1996, indicating an excess of optimism. Factors such as the arrival of COVID-19 vaccines with high efficacy rates from companies like Pfizer and Moderna, the conclusion of the election, and ongoing political developments, including the Georgia Senate runoff on January 5th, contribute to market volatility.

The outcome of the Georgia runoff will significantly influence policies related to taxation, economics, fiscal matters, and social issues, making it a pivotal event for the markets.

In summary, while 2021 may offer promise, the road ahead is likely to be characterized by volatility and uncertainties. Investors are advised to remain vigilant, diversify their portfolios, and seek professional guidance to effectively navigate these shifting market dynamics.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.
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