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The global financial market never stops evolving, continuously creating fresh challenges and opportunities for investors. Among these economic turns and twists, understanding the structures of the bull market – more specifically, the secular bull market – is crucial. The secular bull market is characterized by a prolonged period of consistently rising market prices, sometimes spanning decades. During this phase, secular stocks usually outperform others. However, recently, a major rotation is observed within this market worthy of investor attention.
In the secular bull market, it’s significant to identify and capitalize on the key sectors that spearhead market movement. In previous years, technology, consumer discretionary, and communication services have been the leading sectors, taking the pole position in terms of market performance. The so-called ‘stay-at-home’ stocks allowed these sectors to thrive in the face of an international pandemic due to their remote-functioning capabilities in areas like e-commerce, streaming services, and outsourced technologies.
However, a significant shift is currently happening in the behavior of the secular bull market. Following the rollout of successful vaccination programs and an anticipated return to normalcy, ‘reopening’ stocks are gaining traction. These include sectors such as financials, industrials, energy, and materials, which will all potentially benefit from an economic resurgence as society adapts to post-pandemic conditions. Their rapid growth has caught the attention of investors and market analysts worldwide, marking the pivotal rotation of the secular bull market.
To better understand this rotation and leverage it to their advantage, investors must be aware of the factors contributing to these market changes. Most notably, the financially destructive impacts of the COVID-19 pandemic have caused investors to rethink their strategies. The forced shutdown of physical businesses shifted the focus more towards stay-at-home stocks that could weather these difficult times. But with the global economy gradually reopening and recovering, those sectors severely affected by the pandemic are regaining momentum, driven by investor optimism about the vaccine rollout’s progress.
This rotation can also be linked to rising interest rates, which have always impacted the financial market in various ways. Historically, higher interest rates have usually weighed on high-growth technology stocks because they diminish the present value of future cash flows. On the other hand, they can positively impact sectors such as banking, where the structure of their incomes directly correlates with interest rates. So, as interest rates rise, financial sector stocks see a boost, triggering a sector rotation towards these stocks.
Moreover, inflation expectations have been another driving factor in the current rotation in the secular bull market. The potential for higher inflation has sprung from government stimulus measures worldwide, aiming to sustain economies through the pandemic’s devastation. This escalation of inflation expectations has seen a greater investor migration towards assets typically considered beneficial in an inflationary environment, including commodities.
Overall, the secular bull market continues, but its wings are reshaping. The major rotation is a reaction to a multitude of factors from the COVID-19 pandemic disruptions, rising interest rates, and inflation expectations. The shift towards ‘reopening’
