Blowups and Rotations Making This Market Just as Brutal as 2020

Outwardly, the U.S. stock market has looked pretty calm of late, with the S&P 500 chugging toward what could easily be another 10% year. Underneath is a very different story.

While benchmark indexes glide along, the subsurface churn has been so violent that one measure -- a Bank of America model that plots how much value is being created and destroyed each day in individual stocks -- shows that 2021 has generated more turbulence than virtually any other year. The volatility is just being masked because up-and-down moves in different companies over days and weeks have tended to offset each other.

An extreme example of the trend came Friday, a day of historic gyrations in equities when forced selling by a giant investment firm sent shares of almost a dozen companies including ViacomCBS Inc. and Discovery Inc. to double-digit losses. But someone looking only at benchmark indexes would’ve had no idea as the S&P 500 Index had its biggest rally in a month.

An even starker illustration came in the first week of March, when the S&P 500 eked out a small gain while the Nasdaq 100 fell almost 2%. The stretch was emblematic of a year of industry rotations gone crazy: While energy stocks surged 10% that week and banks rose more than 4%, large-cap tech companies like Tesla Inc. and Twitter Inc. saw billions of dollars erased.

Blowups and Rotations Making This Market Just as Brutal as 2020

The swings are prevalent among small-cap stocks as well, BofA says, where historically improbable gains are occurring at an unprecedented pace. All in all, it creates “more absolute risk than meets the eye” -- almost as bad as this time last year, when the Covid crash was battering investors, analysts led by Benjamin Bowler wrote in a report.

Billions are on the move as investors rotate toward pockets of the market that stand to benefit from a brightening economic outlook. And those trades -- the ones tied to the business cycle -- could have more room to run as additional vaccines are administered and a fresh spending plan is announced by the Biden administration.

Blowups and Rotations Making This Market Just as Brutal as 2020

Meanwhile, the Cboe Volatility Index -- the market’s fear gauge -- has declined to pre-virus levels after a full year of jitters -- even though many investors remain distressed over some of the warning signs still flashing across the stock market’s underbelly.

“The market is going through tremendous rotation underneath,” said Stephen Dover, chief market strategist and head of Franklin Templeton Investment Institute. “The top of the market looks quite positive, but underneath we have roiling volatility and a rotation between different sectors.”

Blowups and Rotations Making This Market Just as Brutal as 2020

Much of the under-the-radar volatility can be traced back to the bond market, where benchmark 10-year Treasuries are wrapping up their worst quarter since 2016. The lurch higher in yields has helped fuel sectors such as financials and energy shares higher, while hitting pricey tech shares, whose valuations are harder to justify in a rising-rate environment.

And while equity market volatility stagnates, turbulence in the $21 trillion Treasury market has been on the rise. The ICE BofA MOVE Index, a gauge of U.S. bond volatility, has been grinding higher. The measure currently clocks in at 67, higher than its 1-year average of 53 and well above September’s low of 37.

Blowups and Rotations Making This Market Just as Brutal as 2020

Still, many expect the rotation to continue. Shares of energy, financials and industrials have topped the S&P 500’s leaderboard so far this year, with each sector posting double-digit advances. And while larger companies have lost steam compared to the momentum they’d seen last year, smaller firms have stepped into the limelight. The Russell 2000 has gained more than 10% year-to-date, double the returns of the Russell 1000 index made up of relatively larger companies. Stocks in the tech-heavy Nasdaq 100 -- 2020’s undisputed leader -- have lagged, though the index is flat for the year.

“There are different names under the surface that are dramatically outperforming, and some of the names at the top of the market-cap tables might be seeing their valuations shift,” said Matthew Weller, global head of market research at

To JJ Kinahan, chief market strategist at TD Ameritrade, it doesn’t mean that investors will abandon tech stocks like Apple Inc. and Microsoft Corp. altogether. But “new sectors keep being strong,” he said by phone. “We’re just seeing strength out of different areas that we didn’t necessarily expect to see strength out of. I think that’s really been the story -- hitting new highs while still trying to figure out where to be longer term for most of the market.”

©2021 Bloomberg L.P.

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