This post was written exclusively for Investing.com
As stocks extend their spectacular first quarter run into Q2, the Christmas Eve rout appears to be long forgotten. Clearly, risk-on is back, at least for a while.
If this trend continues, equities could climb even further in the coming months, as low interest rates prompt investors to go further out on the risk spectrum to find returns. Indeed, share prices are picking up right where they left off at the end of the last quarter. Less than two weeks into Q2, the S&P 500 has already risen 2%, adding to its 13% gain in Q1 and fast approaching its Sept. 21 all-time high of 2940.91.
Semiconductor stocks have surged over 5% through April 11 as measured by the VanEck Vectors Semiconductor ETF (NYSE:SMH), while the Communications Services Select Sector SPDR ETF (NYSE:XLC) has jumped by almost 4%, along with the Material Select Sector SPDR ETF (NYSE:XLB) which has gained 3.3%. All three sectors are risk-on groups comprising companies that would greatly benefit from a recovering global economy.
The rotation taking place in the second quarter has probably been prompted by the Federal Reserve’s indication it may be moving to the sidelines for 2019. That has caused interest rates across the U.S. yield curve to plunge, in turn sending investors starved for returns to the sectors and stocks that might provide the best opportunities.
Broad-Based Rally In Semis
What may be even more impressive is just how broad-based the rallies in these groups have been. Of the top 25 holdings that make-up the Semiconductor ETF, 24 are higher as of April 11. This suggests that investors are buying the group across the board and it's not just one or two stocks leading the sector higher.
The group’s strong performance can largely be tied to what many investors are beginning to believe is a bottom in the semiconductor cycle. Broadcom (NASDAQ:AVGO) noted the cycle was bottoming in its quarterly results at the beginning of March, while a Digitimes report noted that Taiwan Semiconductor Manufacturing (NYSE:TSM) is beginning to see a pick up in orders in 7nm chips.
Materials, Communications Sectors Surge
Material stocks have also seen the same broad-based buying as semiconductors, with 23 of the top 25 stocks that make up that sector's ETF all advancing too. Communication stocks have also risen sharply, with buying across the sector, also with 23 of its top holdings gaining. This is a group that may see massive consolidation, with more entertainment providers searching for content as new streaming platforms come to market.
Technology, Consumer Sectors Not Far Behind
The technology sector is close behind, with its ETF, the Technology Select Sector SPDR (NYSE:XLK) and Consumer Discretionary Select Sector SPDR (NYSE:XLY) both up over 3% this quarter and racing to new all-time highs. Again, all five sectors together are pointing to what seems to be an increased appetite for added risk among investors.
Defensive Sectors Plunge
The two worst-performing sectors so far this quarter have been the Health Care Select Sector SPDR (NYSE:XLV) and the Utilities Select Sector SPDR (NYSE:XLU). The health care ETF has plunged by around 1.25% this quarter, while the utilities ETF has dropped around 50 basis points. Additionally, the Consumer Staples Select Sector SPDR (NYSE:XLP) has fallen about 20 basis points. These sectors are primarily defensive, offering higher dividend yields and payments, along with lower volatility levels. They are primarily a risk-off group, areas that investors flock to when seeking safety.
Treasury yields have plunged along with the defensive sectors, adding strength to the thesis that risk appetites have grown substantially. If the current trends continue, it would suggest that the S&P 500 still has much further to rise, because the only places investors will find the opportunities for big returns will be in stocks—meaning risk-on is back and in a big way.