Ever since markets bottomed last March, leadership has been rotational. During the shutdown, stay-at-home beneficiaries helped mark the low. Massive stimulus measures helped the likes of eBay, Wayfair, Clorox, Peloton and other Covid lockdown winners propel higher. Mega-cap technology (FANGMAN) names pulled forward years of expected growth. Online sales boomed. Mobile work forces emerged. Cloud hosting leapt forward.
That lasted until vaccines rolled out and new leadership emerged. FANG related stocks paused while reopening winners took the baton, helping major averages to continue to set records in November. By February, Hilton and Marriott were making new all-time highs after less than a year of basically having zero guests. Pent-up demand, paired with low interest rates, helped car and home sales spike. Airline stocks doubled in a few months. Retailers left for dead sprung back to life.
Once that trade dried up, money shifted over to SPAC’s, IPO’s, Meme stocks and high beta technology themes with minimal prospects for near-term earnings. Reopening stocks paused their ascent. A continued extension of stimulus, checks in the mail, unemployment benefits and ultra-low interest rates pushed investors out on the risk spectrum. This trade didn’t last too long and many are down 50% from March, especially SPAC’s and Meme stocks. Blockbuster went from 30 cents to $0.0017. Robinhood investors felt the brunt of that pain trade. Lessons learned.
Money flow then found another home after March, reverting back to old growth winners. FANGMAN set new highs as SPAC’s collapsed, reopening stocks gave back 25%+ of their rapid gains, and banks declined along with interest rates. Leadership changed four times in the span of a year, only to find a home right where it started, big cap disruptors which are taking share, growing their top line and seeing margin expansion.
This brings me to the past month or so. Leadership is fading. The average stock is not keeping up with the averages. In fact, the S&P equal-weight index has gone nowhere since May. The market-cap weighted S&P is within spitting distance of recent highs, but 10% of its constituents are down at least 20% and over a third are down more than 10%. Diversified investors are not keeping up with mega caps, yet again.
This week also saw new highs in the S&P 500 accompanied by 281 Nasdaq stocks making annual lows, the most in 40 years. Being big has massive advantages today. Technical indicators such as the Hindenburg omen and Titanic Syndrome are being hit. With names like that, it certainly is not a good sign! That being said, their individual track records predicting market crashes are suspect at best. That doesn’t mean we ignore them though. Key to these data sets are quick recoveries back to new highs.
Further, Consumer Staples, Utilities and numerous REITs have been stronger, although not all are participating. These are not the sectors one wants to lead a bull market. While a few mega caps are holding up, leadership is becoming narrower and narrower. For every Microsoft# that is making new highs, there is UPS still 10% lower. While Apple# made new highs this week, Marriot is off by 20% from its peak. Even Disney# is down 15% from recent prices. Netflix’s# 5% rally yesterday still puts it 10% below January prices.
Pairing recent lackluster market participation with some newfound fears points us towards a continued choppy outlook. Fears keep expanding:
• Outside of Y2K, valuations are at historic highs. It won’t take much negative news to bring stocks down.
• Investors are levered to the hilt. Once the ball gets rolling downhill, it accelerates. Margin calls begin and a quick, vicious cycle feeds itself.
• We have not had a real correction in almost a year. Markets usually realize three 5% corrections annually.
• The Delta variant is wreaking havoc on supply chains, travel plans and parents’ back-to-school plans. Fatalities are hooking back up as well, albeit well below previous spikes in infections.
• Inflation is declining in most areas except two of the most important, rents and wages. If both stay above 4%, history says tightening measures get aggressive and a recession comes down the road.
• Seasonality is not in our favor. Some of the worst declines come in the August – October period. After seeing stocks skyrocket, there’s no reason not to expect a decline that could be self-fulfilling.
• We’re in an earnings vacuum now as we don’t hear from many companies until October as to how the third quarter went. Forward guidance was muted for most, so the low bar is set, but that is many trading days away.
• Afghanistan is a debacle and brings fear to many.
• Tapering is coming sooner than many expected. Although it really shouldn’t affect too many parts of the economy, it is the first step that precedes raising rates and tightening the money spigot which is supporting many investments today.
• Lastly, President Xi is continuing his assault on highly successful businesses and entrepreneurs in China. There are ripple effects from this and even more fear for what he could do next.
With no one left to take a leadership role today, near-term traders are booking gains and parking them in safety (bonds, high dividend payers). Cycles like these are short during bull market runs, but are a necessary cleansing.
All in all, the recipe for a minor pullback is in play. If it were to occur, economic conditions still favor buying any correction. Interest rates could double from here and still be stimulative. Consumers’ pocketbooks have never been flushed with as much cash as today. Home values and investment portfolios are at record highs. If you want a job, you can get one. You can also get paid a lot more today than in years past. Tapering will slow the Fed’s balance sheet expansion, but it remains 3X the size in 2019. They will be major buyers in Treasury issuance for years to come. Markets kept advancing, substantially so, during the last taper. Growth, peaking in Q2, is still coming in hot. This should last for several quarters. Last, but not least, our Government is proposing even more spending bills which will help GDP in the future.
Day trading and trying to pinpoint a top or bottom is a fool’s game. Fun, yes, but hardly a proven strategy over the long haul. Rather, it may be time to check asset allocations again. Stocks are up 20% while bonds are flat. Make sure you are sticking to your discipline. Prune companies that rely on stimulus. Book profits in stocks that became outrageous in size. Now is not the time to get overly aggressive. Some cash may be prudent but the long-term outlook is still quite positive.
Actor Andrew Garfield is 38 today while actress Amy Adams turns 47. Legend Robert Plant is 73. Al Roker hits 67.