For most of the past week, that referred almost entirely to the salsa, guacamole, and blue cheese dressing for Super Bowl snacks. For stocks, cryptocurrencies, precious metals, and other risky assets, investors were more inclined to sell first and ask questions later. That is, until Friday, when a mood reversal lifted the Dow Jones Industrial Average past the 50,000 mark for the first time.
Once again, artificial intelligence was at the center of the selloff, amid worries that software would be made superfluous by Anthropic’s Claude applications. That was reminiscent of the slide that occurred almost exactly a year ago when DeepSeek from China offered a credible AI alternative at a fraction of the cost of OpenAI’s ChatGPT. Memories of the eventual recovery from that rout had the dip buyers returning on Friday, causing a boisterous 2% bounce in the S&P 500 index, the biggest daily gain since last May; that pared the week’s loss to 0.1%.
But well before the past week’s gyrations, the stock market’s character already had undergone a significant transformation, one that resembled what followed the dot-com boom at the end of the last century: Technology stocks ceded their leadership to a broader swath of the market.
Sound familiar?
Back then, the equal-weighted S&P 500 surpassed the more familiar capitalization-weighted benchmark, with a 10.7% gain from the tech-stock peak on March 27, 2000, through the end of that year; the cap-weighted index fell 13.4%, according to a client note from Deutsche Bank strategist Jim Reid. Similarly, since last Oct. 29 through Feb. 4, the equal-weighted S&P 500 gained 6.3% while the cap-weighted S&P was off 0.1%, amid a dramatic rotation.
Among sectors, “Energy (+20.6%), Materials (+18.3%), and Consumer Staples (+13.8%) have surged, while Tech is down 11.2%,” Reid wrote. And along with the Dow, the equal-weighted S&P—tracked by the Invesco S&P 500 Equal Weight exchange-traded fund—closed at a record on Friday.
“A similar pattern emerged in 2000,” Reid added. “After Tech peaked in March of that year, Consumer Staples, Utilities, and Healthcare rallied about 40% to 45%, even as Tech and Communications slumped 51.8% and 39.4%, respectively.
“By that September, the rotation had not yet inflicted major collateral damage: The S&P 500 came within a percentage point of its all-time highs from six months earlier. But by year end, the Tech selloff deepened to the point where strong gains elsewhere could no longer compensate. The index ultimately finished 2000 down 13.4% from the point where Tech peaked, even though the equal-weighted index was up 10.3% in that time. So, for most stocks, 2000 was still a very good year.”
Investors have again made the defensive move to consumer staples, but this time the sector may offer less protection, Barron’s Paul R. La Monica pointed out this past week. Retail giants Walmart and Costco Wholesale command price/earnings ratios about twice that of the S&P 500’s P/E of 22, he noted. The bargains may be found mainly in Walmart’s and Costco’s stores, not their shares.
Also increasing the volatility in stocks this past week were the crashes in silver, gold, and Bitcoin, contends Evercore ISI’s strategy team, led by Julian Emanuel. FOMO, or fear of missing out, suddenly shifted to get me out as the previously extreme upward momentum in those asset classes suddenly reversed. The steep drops in precious metals and Bitcoin served to “infect stocks” and sparked the “violent momentum rotation” into more-defensive sectors, the Evercore team added.
Nowhere was the reversal more dramatic than in silver. The iShares Silver Trust ETF this year has had a stomach-churning round trip from about $70 to nearly $110 and back. Which led me to seek out William Silber, who literally wrote the book on the subject, The Story of Silver: How the White Metal Shaped America and the Modern World.
“There’s an old saying that markets will use the news to do whatever they want,” Silber said in an interview. Precious metals pulled back from their peaks after Kevin Warsh was nominated on Jan. 30 to succeed Jerome Powell as chair of the Federal Reserve Board, which traders used as an excuse to take off some risk following the headlong advances in silver and gold, he observed.
Warsh has indicated a strong preference to shrink the Fed’s balance sheet, the expansion of which has supported the inflation of asset values, including stocks, precious metals, and cryptocurrencies. He is also seen as less likely to support the so-called Fed put to come to the rescue of risk markets, which was initiated by former Chair Alan Greenspan and continued under his successors, Ben Bernanke, Janet Yellen, and Powell.
After the big football game, investors and traders will be looking ahead this week to the delayed release of January’s employment report on Wednesday. The consensus of economists calls for a 70,000 increase in payrolls and an unchanged jobless rate of 4.4%—after annual benchmark revisions that will significantly lower last year’s employment totals. That should keep the Fed on hold for the next two policy meetings, in March and April.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
