Stocks rallied once again as bond yields held steady. Economic data continues to show an economy in slow growth mode. Thursday morning’s CPI release will give some hint as to whether inflation is slowing at a pace sufficient to allow the Federal Reserve to slow its pace of rate increases. Markets certainly are expecting the pace to slow after Fed officials hinted as such.
As I have been noting, the other major influence is the rotation from the largest tech names to the rest of the market. Using the S&P 500 as a proxy for the market, when big institutions are selling a half dozen stocks and spreading the proceeds among the other 494 constituents, you get a broad rally. Since the end of September, the Dow Industrials are up 15%, the S&P 500 less than 7%, and the NASDAQ Composite is virtually unchanged. Look at the big tech companies, Apple#, Microsoft#, Amazon#, Meta Platforms#, Alphabet# and throw in Tesla. These six names comprise less than 10% of the Dow, close to 25% of the S&P 500, and over 40% of the NASDAQ 100. You don’t have to go any further to explain the differences in performance.
While some tech stocks have started to find footing over the past few days, there have been large discrepancies within the broad sector as well. The big names are trying to stabilize. For the most part, they are not rallying yet with the overall market, as the pressure from big investors shifting from overweight to underweight isn’t complete. But for those outside the biggest names with solid fundamentals and fair valuation, there has been some recovery. At the other end of the tech spectrum, for those companies long on sizzle but short on steak, the impact during earnings season has been savage. Use Carvana as an example. Carvana is a relative newbie to the used car industry, selling only online. You may have seen some Carvana towers along highways. At its euphoric high, it sold for over $375 per share. This week, after poor operating results were reported, it set a new all-time low at just under $7. It’s dubious whether Carvana will ever earn a dime. Carvana is just an example. If you have read my notes in the past, a good part of the bear market was the piercing of excess speculation, especially when the speculation proves more hype than real. I have stated that despite the fall from favor throughout the first half of the year, I didn’t think we had seen the final flush. These past two weeks suggest we are finally at that stage. For those who didn’t buy these names, that’s good news. We need to eradicate the temptation to buy the trash at any price.
As for the rest of the market, the rotation from the big tech names has probably elevated prices to a point where few real bargains remain. Thursday’s CPI report will be a binary moment for the market. Investors will either be happy or sad with what they see. There will be one more employment report and one more CPI report before the Fed concludes its December FOMC meeting. Seasonally, this is a good time for stocks. Mutual fund tax selling season is over. Companies that have reported earnings to date (over 90% of the S&P 500) can now repurchase stock in the open market. Normally, investors look to the following year with optimism. That may not be the case this time around as most expect a recession some time next year. We don’t have a profound guess. It will be close.
I have not yet spoken about the election. I will start with one observation. For the most part, the course of the economy is not affected materially by either the White House or Congress, the exception being major changes in the tax code that impact corporations or investors. Off-year elections usually help the party out of power. A Democratic White House and a Republican Congress (even just one chamber) usually means legislative gridlock. For the most part, Wall Street prefers gridlock to the alternatives, but whether there is a recession next year or not, or how fast inflation declines, is largely out of their collective hands. Demographics and central bank policy will prove much more important.
At this early morning juncture, it appears that the control of the Senate will once again be dependent on a run-off in Georgia. As for the House, it is likely to swing to Republican control. However, Republican net gains appear to be less than predicted. What this means is that if Republicans want to stand against the White House over the next two years, the party will need near unanimous support among its caucus. That should happen in most cases, but as Manchin and Sinema show in the Senate, nothing is guaranteed. Futures are indicating a slight retreat from yesterday’s gains, reflecting Wall Street’s disappointment that a Republican sweep didn’t happen.
Lou Ferrigno, better known to us by his stage character the Incredible Hulk turns 71 today.
James M. Meyer, CFA 610-260-2220