Ground Lost

 

Ground lost.  Stocks slipped in yesterday’s session as fears of a COVID surge reemerged.  A late boost in technology shares helped indexes close off their lows.

 

N O T E W O R T H Y

 

Running but not hiding. 

Yesterday was a tough day for stocks.  Earlier in the session it appeared that there was simply nowhere to take shelter in a storm of selling.  Surely there were many watchers who began to reminisce those tough days we experienced back in March.  I will spare you the gory details, but I am sure you get the picture.  It is important to employ a bit of perspective.  Back in March the road ahead looked bleak because the market was dealing with unknowns that were never experienced before.  The virus was raging and killing and no one knew what the human impact might even be, never mind economic or market impact. Understandably, the situation led some equity investors to sell, knocking the longest bull market in history off of its feet in epic fashion.  Since then, the $2.2 trillion CARES Act was enacted, the Fed has injected record sums of monetary stimulus, the world’s top drugmakers have joined Operation Warp Speed in order to bring therapies to market quickly, and advances in treatment protocols have lowered death rates. All of these have helped markets claw their way back from depths as unknowns have become knowns.  There have been clear winners and some clear losers.  Energy, financial, travel, entertainment, and cyclical stocks have struggled to regain their footings, while technology, WFH (work from home), and growth stocks surged.  Though the list of unknowns began to shrink, the world still remained in the throes of a pandemic, and global economies continued to contract.  Fast forward to August where the S&P500 joined the Nasdaq at new highs.  The Nasdaq is dominated by technology growth stocks while the S&P represents a broader array of companies.  However the S&P has become highly influenced by technology stocks with its top 5 weighted stocks being tech, which had a big hand in propelling the index to its new highs.  The theme here is technology.  Why technology? Because technology stocks are primarily growth stocks which have the ability to produce significant future earnings growth through innovation.  They are also less subject to cyclical downturns in the economy.  Throughout the pandemic and beyond these stocks have great potential which is why investors go to the group when all others are struggling. Pandemic aside, technology has historically outpaced the overall markets.  Since the end of the last recession in June 2009, the total stock market has posted a total return of +338% while the Nasdaq Composite Index returned +574%.  The Nasdaq 100 Index, which represents the Nasdaq’s largest non-financial companies is dominated by technology shares and it had a total return of +740% over the same period.  However – and this is big HOWEVER – those great returns didn’t come without cost. The cost of great upside is volatility, which means large upswings also mean large downswings.  The good news for growth investors is that there have been more of the former and less of the latter.  In the past few weeks some new unknowns have begun to creep back into the market.  Congress’ unwillingness to pass a new stimulus package has gotten economists, the Fed, and some stock traders on edge. The US grows closer to a fractious election and virus cases have begun to climb once again. These unknowns have led to a decline in stocks in the past several weeks with the S&P falling by -6.96% and the Nasdaq dropping by -9.72% since the onset of September.  The tech-heavy Nasdaq led the downturn as expected… and explained above.  As traders sold their tech shares they appeared to be investing in the more cyclical industrials and materials sectors, down just -3.16% and -1.97% respectively for September to date.  Many analysts pointed out a rotation out of tech into sectors which would benefit from a full economic recovery.  However something interesting took place in the midst of yesterday’s selling. When the smoke cleared, the information technology sector gained +0.76% while industrials and materials lost – 3.38% and -3.41% respectively.  While it is too early to tell if yesterday was a reversal of the aforementioned rotation, it is clear that traders chose to go back to their old comfort stocks.  Perhaps they were attracted by the lower prices resulting from the recent selloff… or perhaps they looked back in time and realized that, while the materials sector has returned +203% since the last recession, the information technology sector returned +710% in the same period and that the recent volatility is simply the price of membership.

 

THE MARKETS

 

Stocks sold off yesterday as virus cases display some upticks in Europe and the UK.  A potential cover up by some of the largest banks also weighed on stocks. The S&P500 slipped by 1.16%, the Dow Jones Industrial Average tumbled by -1.84%, the Russell 2000 dropped by -3.35%, and the Nasdaq gave up a slim -0.13% (see above).  Bonds rose and 10-year treasury yields fell by -3 basis points to 0.66%.

 

NXT UP

 

– Existing Home Sales (Aug) are expected to have risen by +2.4%, down from last month’s +24.7% advance.

– Fed Chairman Powell will appear with Mnuchin in front of lawmakers today.

– Fed speakers include Evans, Barkin, and Bostic.

– AutoZone and Nike will report earnings after the bell.

 

 

daily chartbook 2020-09-22