Bank of America’s experts reportedly seek to calm nervous investors by reassuring them that the bull market is still “alive and well” despite recent volatility to start a historically week month.
A closer look at the internal shifts in the markets shows that there is not a reason for alarm, Bank of America said, according to CNBC.
“While some may herald this as a long-overdue correction six months after-the-fact, a view of sector rotation shows evidence of a healthy market with a normal tactical correction,” the note said.
“August saw the cyclical sectors of Industrials and Financials perform better than the S&P 500 on both an equal weight and market cap basis. If this rally were nearing its end, we would expect underperformance from these two groups,” the note said.
High-flying tech stocks have been bruised the most in the recent tumbles, but cyclical names have held up better.
“While we’ve seen deterioration in the performance of market leaders, we have simultaneously seen signs of stabilization from cyclicals such as Industrials and a lack of outperformance from defensives. In essence, this all aligns to support our tactical risk, bullish backdrop message,” the bank said.
Meanwhile, the S&P 500 was largely flat in afternoon trading on Friday towards the end of another volatile week as investors digested data that suggested a long and wobbly economic revival from a coronavirus-led downturn, Reuters reported.
Mega-caps were set to fall between 5% and 8% for the week, extending losses from last Friday that brought Wall Street's rally to a screeching halt.
The S&P 500 was headed for the first back-to-back weekly decline since March as concerns about the massive build-up in call options tied to tech names exacerbated the selloff.
"We are seeing some rotation from the previous leaders into some of the laggards and it's a potentially encouraging sign that we're not just having a 'sell everything' moment like in March," said Ryan Detrick, senior market strategist at LPL Financial in Charlotte, North Carolina.
"It's just going to be much more of a volatile give-and-take relationship and it might cause some investors some pain on those pullbacks," Detrick said.
Many investors view the slump as a healthy consolidation after a stunning five-month rally in the S&P 500 that was powered by a narrow group of heavyweight tech names and scores of fiscal and monetary stimulus.
Meanwhile, latest data showed U.S. consumer prices increased solidly in August, but the labor market's slack is likely to keep a lid on inflation as the economy recovers from the COVID-19 recession.
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