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 Market Mysteries of the week

  Why does it feel like certain stocks have good weeks and bad weeks?

Answer In the short term, it’s rarely company-specific news that drives the fluctuations in a company’s stock price. Instead, different sectors and industries flow in and out of favor with investors based on the prevailing emotional theme of the week. This week, the theme was fear of stimulus coming to an end.Why is stimulus ending? It’s not yet. But policymakers this week started hinting that they were thinking about eventually transitioning from an unprecedented emergency stimulus mode back to a more normal economy. This seems like something most people would expect, but professional investors really have nothing to do all day but think about what to buy and sell, so we get a little excited when there’s any kind of news.How is that a “theme”?Investing is a long-term game, even if you’re not holding your investment for more than a day. Because investors are always buying and selling in anticipation of what will happen to a business over the next 3-5 years, policymakers said stimulus might end in 2-5 years. Still, investors acted on it now, selling certain stocks and buying others. Because investors make decisions based on ideas about what will happen, the market flows along with these themes. The theme here is that investors worry the economy won’t be growing as quickly when the stimulus comes to an end. So investors decided to sell their investments in companies that are more sensitive to economic conditions. These are cyclical stocks, which we’ll explain next.These themes change all the time, sometimes daily. Trying to forecast how a particular company will perform in 3-5 years based on one thing that might potentially happen in 2-5 years is not an exact science. So it’s all really about changes in investors’ emotions.How are stocks affected by a change in theme?Investors group stocks by how the companies tend to perform in particular economic conditions. Companies whose success is tied more closely to the health of the economy are called cyclical stocks. Cyclical sectors are things like industrials, airlines, furniture, autos, or hotels - things consumers and businesses spend more on when the economy is doing well. Non-cyclical sectors, sometimes called defensive sectors, are things that we’ll spend money on regardless of the state of the economy, like medicine, utilities, or some technology.You might also hear terms like Value vs. Growth, but those are a little more subjective. Value investing implies investing in companies that you think are worth more than they’re getting credit for. Growth investing means you’re willing to pay up to buy a company because you have a lot of confidence it will be worth even more eventually. Growth investors usually choose companies based on big ideas and innovations that aren't tied to an economic cycle. In contrast, value investors are trying to choose strong, established companies that may have gone out of popularity at this economic moment.So value vs. growth and cyclical vs. non-cyclical are related, but not the same. Use of the terms can often overlap, and as such, the performance of the two groupings can overlap.What happened this week?Since investors decided the news of an eventual end to stimulus meant we were shifting away from the fast-growing economy theme to the slowing economy theme, they sold some of their investments in the cyclical/value companies whose performance depends more on a strong economy.Cyclical/value sectors sank, while more growth-focused companies held stronger.Below is this past week’s performance of three indexes investors use to track sets of companies. The S&P 500 (green) represents all of the biggest 500 US public companies, which we could consider as the average indicator or “The Market.” The Dow Jones Industrial Average (grey) is seen more as a value stock indicator. The Nasdaq (blue) is seen more as a growth stock indicator. Should I do anything?Probably not. Just remember that there’s always a prevailing theme or two that the market is bouncing between. Right now, it’s been whether we’re going to grow really fast from the stimulus and create high inflation, or we’re going to hit some major slowdown from a poorly-managed recovery. It changes by the day, and the relative stocks move with their themes. Wall Street makes their living trying to figure out which themes will prevail, bouncing back and forth. Everything fluctuates, but the strongest companies, industries, and economies increase in value over the long term.Please feel free to forward this to anyone who might find this interesting.💙 The Scoop Team

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