If the world is feeling more mixed up than usual, rest assured, the stock market reflects this confusion and is holding up very well.
It might not look like this on the surface. the
gained 0.8% to 11,671.56 last week, while the
S&P 500 Index
increased by 0.2% to 3,483.81, and the
Dow Jones Industrial Average
rose 0.1% to 28,606.31.
The fact that the market ended the week higher was impressive given the news. There was a spike in Covid-19 cases in the United States and abroad; two Covid-19 trials,
Johnson & Johnson
(ticker: JNJ) for a vaccine and
(LLY) for treatment, were suspended for security reasons; unemployment claims increased unexpectedly; another stimulus package remains elusive; and there is an election in less than three weeks.
Any one of these products alone could have been a reason to sell, and yet the market resisted. The market is in a bullish mood and wants to stay so, said Dave Donabedian, chief investment officer at CIBC Private Wealth Management.
Still, the week was not as clear as the gains they suggested. On Monday and Tuesday, the Nasdaq outperformed the Dow Jones by 2.2 percentage points, as investors grabbed tech stocks and avoided more economically sensitive tariffs. Then they switched back to cyclical stocks, with the Dow outperforming the Nasdaq by 1.4 points over the last three days of the week, suggesting a rotation to cheaper stocks and away from costly growth.
There were even rotations in the rotations. Wednesday the
Energy Select Sector SPDR
the exchange-traded fund (XLE) gained up to 2.8% before ending the day 0.4% higher, while the
Select Sector SPDR technology
ETF (XLK) fell 1.3%, but only finished 0.4%. Obviously, investors cannot decide what to buy and what to sell.
Normally, that kind of indecision would portend an unhappy end, at least for Hamlet. But for the stock market, this could actually be good news. That’s because investors aren’t wholesale stocks to reduce risk in the face of mixed data and uncertain results. Instead, they seem to be trying to figure out the right positioning, whether it’s a Donald Trump or Joe Biden victory, a spike in Covid cases or successful treatment, or a slowdown in the economy versus an acceleration.
It all changes from day to day, so the result is a market swing, says Peter Kenny, independent equity strategist at Kenny & Co. Investors don’t reduce risk by selling the market, he explains. Cautious investors say: I love the market and I go where there is the greatest perceived value.
Where it is exactly it remains a point of contention. Cyclical stocks are undoubtedly less expensive than growth stocks, and long-suffering value investors insist that the group will someday have to outperform.
For a while it once seemed like it was now after a highflying software company
(FSLY) has published guidelines on highlights. The reduction in income was not huge, only 5% or so the reaction of the stock was huge: its shares fell 27%. Yet even after falling, the stock ended the week up 322% in 2020 and traded at 17 times sales, more than seven times the S&P 500 2.4 times.
Still, it’s too early to read a company’s pain as an omen for all technology, especially since the rise of the Nasdaq was not driven by lousy software companies no matter how expensive they are, but by
(AMZN), which, with
(TSLA) accounted for half of the 2020 Nasdaq 100s gains. While we think the turnaround time is getting closer, we don’t agree that this rapid reduction in tips is a canary in the coal mine signaling the end of technology outperformance, writes Tom Essaye, author of The Seven Report newsletter.
Fortunately, choosing a side doesn’t have to be a long-term commitment. Wolfe Research strategist Chris Senyek, for example, argues the market is overly bullish on everything from trends in Covid-19, economic data and what a Biden would mean, as monetary policy continues to drive growth and momentum stocks. That being said, he launched a renormalization basket, which includes battered stocks like
(MTN), among others, which investors can use to profit from these fluctuations.
A positive flow of vaccine information and choppy economic readings are likely to lead to several short-lived renormalization trades that favor some of the more battered sub-sectors and companies, writes Senyek. Above all, we view this basket as a vehicle of exchange until it appears that growth prospects will improve in the long term.
When in doubt, exchange.
Write to Ben Levisohn at [email protected]