The bigger the pop, the bigger the drop! High flying momentum names finally took it on the chin yesterday. Overall, the Nasdaq was down 5%, while the Dow held up much better, declining 2.8%. Underlying weakness is hitting stocks that rose the most while some proceeds are going into 2020’s “loser” bucket, including airlines, hotels, cruise lines and banks. This rotation is healthy, and quite frankly, long overdue. That does not mean the momentum & growth bull market is done, but overbought conditions have been prevalent for quite some time. Valuations were getting out of whack. Narrow leadership is not what normal bull markets prefer to see. A pullback is quite common at this stage. Two steps forward, one step back. Newly minted day traders are realizing there are two sides of every investment choice and markets don’t go straight up.
Corrections in bear markets are quick and powerful. Stocks that got excessive on the way up, namely big-cap tech, are the most affected. Tesla is the perfect example. The stock advanced tenfold over the past year making it one of the largest stocks in the S&P 500. In terms of market cap, they exceeded Wal-Mart. Their largest independent shareholder started to pare down their holdings recently after realizing $17B in profits in just eight months. This helped lead to a ~20% stock decline, wiping off nearly $100B in value over just three trading days. Apple has lost over $200B in the same time frame. That’s the size of Coca-Cola. Again, in just three trading days!
Reasons behind the sell-off can be numerous for momentum names. Election concerns, vaccine approvals that slow the work-from-home trend which benefitted companies like Zoom, overvaluation or simple profit taking are all to blame. As we enter a historically rough period (September has been the worst month for equity investors), volatility on the downside ramps up. Support levels for many growth names are a lot lower than today’s prices. Judging by the futures market today, there is more downside in Tech land but the Dow is solidly green. The better than expected jobs report out today could change this during normal market hours. Unemployment is already back to single digits, coming in at 8.4%.
This does not mean the end to the bull market though. Mini-bubbles have to get deflated a bit. That could be 5% or 20%, no one knows at the moment. The future is still bright for many post-correction. Major averages are dominated by big cap leaders but capital raised from selling them has to go somewhere. Many banks, consumer and REIT stocks were flat or up yesterday. Winners and losers going forward could be broader based as we look towards an economy getting back to normal. That’s positive for diversified accounts. The pandemic and lack of inflation have held back a lot of stocks this year.
Recent CDC comments lead investors to become increasingly encouraged there will be multiple vaccines approved for use this year. If Trump has his way, it will come before the election, as he hopes to boost consumer confidence. Many treatment options are arising too. Whether it is six months or eighteen, we will beat Covid. At worst, we will learn to live with it better. Children will go back to school at some point. Restaurant, mall, gym and movie theater traffic returns. Weddings, family reunions and the like are coming next year. Demand for vacations in 2021 is already elevated. The momentum stocks that benefited will lose some lockdown-infused growth. That could be part of the rotation today and the sizable pullback in leadership tech.
However, investors are flush with capital. A 10% decline in the stock market will not stop next year’s spending. Consumer net worth is at record highs. Any new income is looking for a home and interest rate products offer negative real returns. Helicopter money from the Fed and Government was massive, beyond historic. Check out the chart below. The US never exceeded 15% year over year growth in Money Supply before this pandemic hit dating back to 1960.
As we all know now, not all of this money was spent. Some went to paying bills. Judging by my mall tours, some went to sneakers, shoes, purses and electronics. A lot went to home improvements. Hardly any of this went to vacations, restaurants or normal leisure activities. Post-Covid, the huge increase in savings shown below is going to be spent in different areas than what we saw in 2020. That creates a different list of winners and losers. The cruise stocks were all green yesterday as some European cruises are approved.
A massive increase in money supply almost always leads to inflation. Since we had the oddest recession ever created, it makes sense that normal economic truths would be wrong again. Money velocity is used to measure how many times a dollar spent is circulated around an economy. As you can see in the chart below, lack of spending options helped hold back money velocity, which kept a lid on inflation. There is concern this will ramp up after we get back to our normal day-to-day lives and that will lead to a very different market. Higher inflation in 2020 would bring lower P/E’s for high flying growth stocks.
The end result is there’s a lot more to this market than just the biggest large-cap technology leaders. Momentum names have attracted the most attention, and investor fund flow. As we normalize our economy and open up fully, this could switch. There is enough money infused into the system to support more than a small handful of winners. Obviously, we have to get past the virus fear period first. Yesterday’s rotation is a healthy start, even if painful for those holding outsized positions in mega cap technology.
Today, Beyonce turns 39 and comedian Damon Wayans turns 60.
James Vogt, 610-260-2214