Wednesday's Market Minute: 5 Easy Steps To Enjoying A Market Rotation

With the market undergoing one of its sharpest leadership shifts in the history of this bull market, these are exciting times. After a decade of record-breaking performance by growth companies, this past week has brought a rally in value stocks at the price of losses in momentum leaders. Here are 5 Easy Steps to ensure you enjoy this peaceful transition of power:

1. Be in the stuff that gets rotated into.
2. Stay there for a while.
3. Hope for the best in the economy.
4. What are you doing, stay there!
5. Just wait until earnings, it will go back up.

Indeed, these are very different from the two simple steps to enjoying a momentum rally:

1. Buy an index ETF.
2. Watch it go up.

A value-driven market is very different than a growth and momentum-driven one. There are some positive dynamics associated with a rotation into value, like a pullback in expensive stock prices and the opportunity for rewarding active management. But there are a few very big catches for the overall market. By nature of the size of growth companies, those stocks going down is a more important factor for the level of the S&P 500 than value stocks going up.

Value investing also requires fundamental follow-through. The companies rallying in the value cohort right now include energy, retail, and financial stocks, all of whose businesses will want to see continuing strength in the economy. The latest correction in growth stocks is happening in retail trading favorites like enterprise tech and cloud companies. After rallying nonstop for nine months, some of these drops may get dizzying and big enough to sour consumer sentiment on the market. If this rotation happens too fast, the result may look more like winter of last year than some new value utopia.

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