Ditching Semiconductors for Finance and Healthcare...Momentum Stocks Warned of Largest 'Plunge' Since 2020

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As funds flowed out of well-performing semiconductor and momentum stocks, the market's long-standing laggards emerged as defensive plays to avoid a summer plunge. Wall Street is quickly shifting positions to stocks with lower volatility rather than chasing high returns.

According to investment media MarketWatch on July 8 (local time), the Invesco S&P 500 Low Volatility ETF (SPLV) outperformed the Invesco S&P 500 Momentum ETF (SPMO) by 10.7 percentage points over the past two weeks. This is the largest two-week gap since the launch of the Momentum ETF in October 2015. Investors are selling semiconductor stocks and moving into finance, healthcare, and consumer staples.

James St. Aubin, Chief Investment Officer and Portfolio Manager at Sierra Investment Management, said, “Investors can either leave the market entirely or look for other opportunities,” adding, “The current trend is clearly the latter.” SPLV holds 100 S&P 500 Index (SPX) stocks that have had the lowest price volatility over the past 12 months. This is the reason why low-volatility stocks, which had long been overshadowed by growth and momentum strategies, are gaining attention again.

The selling pressure on momentum stocks is intense. Goldman Sachs' high-beta momentum stock basket recorded its largest decline since 2020 over five trading days through July 7. Financial writer Mike Zaccardi said, “July is a notoriously weak month for momentum strategies,” adding, “As the midterm elections approach, investors seem to be reducing risk while remaining in the market.”

Seasonal risks are also contributing to the shift towards defensive stocks. Zaccardi explained that August to October in a midterm election year is one of the weakest periods for the stock market in the four-year election cycle. Doubts surrounding the Iran conflict and the sustainability of the artificial intelligence investment frenzy are also increasing investor caution.

Razmig Der-Tavitian, Chief Investment Officer at Evolve Private Wealth, stated, “When the artificial intelligence fervor subsides, companies with attractive valuations and real cash flows will be rewarded.” It is unclear how long the recent strength in low-volatility stocks will continue. However, professional asset managers suggested that low-volatility stocks are likely to show relatively strong performance for at least the next few months.

[Article Key Summary]

-The low-volatility ETF outperformed the momentum ETF by 10.7 percentage points over the past two weeks, marking the largest gap ever.

-Investors are shifting from semiconductor and momentum stocks to low-volatility sectors such as finance, healthcare, and consumer staples.

-Seasonal weakness from August to October in a midterm election year and concerns about AI investment are strengthening the case for low-volatility defensive stocks.

*Disclaimer: This article is for investment reference only, and we are not responsible for any investment losses based on it. The content should be interpreted for informational purposes only.*