Alicia Levine of BNY Mellon said today on Bloomberg Surveillance that over the last couple of weeks, the top 5 tech stocks have been down > 5%, while the rest of the S&P 500 was up 5%, suggesting a broadening of the market.

So is this the time to rotate back into cyclical stocks, so-named because they tend to follow economic cycles?

I can only speak for myself, but one thing you might want to ask yourself before making a decision is if you can pass the sleep test: Are you going to lose sleep if the money you invest in cyclicals doesn’t provide you with returns within the next year? If the answer is “yes” –that’s a fail– then you may want to hold off.

My portfolio is currently heavily biased towards cyclicals known as materials stocks; specifically, producers of the commodities copper, zinc and coking (steel-making) coal that are sold around the world. Investing in these stocks can be a real roller-coaster ride 🎢, even within a single day. It’s not for the sleep-deprived.

While I picked up some shares after the market drop in late March, I’m in a holding pattern now. Keep in mind that my time horizon is several years. I’m not looking to make gains that I can live off or cheer about right now or in the next few months. This makes it easier to sleep at night.

The (currently) weaker US dollar is considered good for materials stocks and other cyclicals. But it’s not as simple as that. To illustrate, let’s say you’re Japan and you want to buy some coking coal to make steel. The coking coal is priced in US dollars. Not only are coking coal prices relatively low right now, but because the dollar is weaker, you can buy more dollars with your Japanese yen, which means you can buy more coking coal. It’s as if coking coal is “on sale.”

Except that sales don’t matter nearly as much in the middle of a pandemic, with no vaccine or broadly effective treatments. Macy’s has tonnes of “great deals” on clothes right now, says my wife. But every time I go there with her, it’s, like, dead. Ghost town. 👻

Covid-19 is acting like a giant brake on human activity. We’re working less, driving less, shopping less, building less, and so on. Simply stated, that’s why global steel production is down, as is demand for coking coal. For instance, Japan’s steel output is forecast to fall 28% during July-September compared with last year. It will recover, but nobody knows when. (Even if you guess and later find out you were correct, you were never actually right. 🙂 )

As I’ve said before, based on how poorly we’ve “managed” Covid-19 to date, whether it’s the spread of SARS-CoV-2 itself, the production and distribution of PPE (e.g. masks), or public education, I see no reason to expect that the vaccination of the world against this disease will proceed smoothly when the first vaccines arrive. In the meantime, I’ll be in a holding pattern just in case my material stocks drop in price again.

Oh, and that recent drop in the top 5 tech stocks? Well, if it continues and turns into a tumble, it may well bring cyclicals down with it. That may be a good time to pick up some shares of the latter “on sale” –if you can pass the sleep test. 😴