By Pete Biebel, Senior Vice PresidentPrint This Post
The disparity in performance between the few leading groups and the rest of the market widened again last week. While it feels like the averages have been steadily marching higher, it’s been a relatively small group of stocks that have been racking up most of the gains. Most groups have been trading sideways or lower since early-June. Thanks to a big day on Friday, the Dow Jones Industrial Average (DJIA) ended the week with a gain of nearly 1%, but that merely reduced its net loss for the past five weeks to a little less than 4%. The S&P 500 Index (SPX) was a bit better, gaining 1.76% for the week and reducing its net loss over the past five weeks to 0.28%.
There’s a huge performance gap between those two indices and the NASDAQ Composite Index (COMP). COMP gained a little more than 4% last week. That boosted its return over the past five weeks to more than 8%. The narrower NASDAQ 100 Index (QQQ) has been even stronger. It’s an index of the 100 or so largest non-financial stocks on the NASDAQ market. QQQ was up nearly 5% last week, and its net gain over the past five weeks is 10.5%.
Just a peak at the performance of the individual sectors explains the gap. Only three of the S&P industry sectors have net gains over the past five weeks. All of the other eight have lost ground over that stretch. Not surprisingly, the Technology sector tops the list. It has a net gain of about 6.5% over the past five weeks. Next best is the Communication Services sector, which includes the social networking, video streaming and video gaming stocks that have benefitted from the need to shelter at home. That sector’s net five-week gain is now nearly 4% climbing about 5% last week. The Consumer Discretionary sector is the only other to post a net five-week gain. While this sector includes some cruise companies and some traditional retailers, it also includes some online retailers, which have been largely responsible for the sector’s better-than-average performance. This sector’s gain of 3.67% last week helped its five-week gain stay positive at +1.24%.
Just a peak at the performance of the small-cap and non-cap-weighted indices reveals a significant performance gap compared to the large-cap indices. The Russell 2000 Index of small-cap stocks (RUT) was down 0.74% for the week, and now has a net five-week loss of about 5.5%. The equal-weight S&P 500 Index has significantly underperformed the cap-weighted SPX. The equal-weight version has lost more than 7% over the past five weeks including a 0.22% loss last week.
Several factors have been primarily responsible for lifting the market averages from their March low. The first was simply the extreme oversold condition at the March low. The first 10% to 15% of the rally came in the form of a snap-back rally through the vacuum left by the air pocket decline into late-March. A more significant and more sustainable factor was the monetary and fiscal stimulus that left the markets awash in liquidity. But a third significant factor was the realization that many companies would actually benefit from the shelter-at-home phenomenon.
Through April and May, a lot of that free money, encouraged by the promise of a soon to be re-opening economy, flowed into the U.S. stock market. Where else could it go? The market’s upward momentum also spawned a surge in speculative activity. That excess speculation was one of the features I cited in my article six weeks ago, “Terminal Velocity.” At that time, I theorized that the rally from the March low was due for a timeout. Since then, the potential for a speedy recovery has dimmed. This has been evidenced by the extreme gap in performance noted above. Stocks that benefit from an extension of the shelter-at-home requirement have continued higher while most other stocks have faltered.
Yet, the free money is still out there. The upward momentum of the leading stocks is still strong. But the lack of performance for the majority of stocks suggests that the market may have reached the point where the Fed’s support has been offset by the growing threat of a slower than anticipated economic recovery. If the market is going to continue higher, it will need to see improved performance in the lagging sectors. The gains in the leaders have certainly been impressive, but many of them seem to be very richly valued at current prices.
One area that has the potential to outperform U.S. equities in the months ahead is emerging market equities. In recent weeks, in my internal commentaries for our advisors, I have noted the improvement in several of the emerging market indices. Last week, the gains in markets in China, Brazil and an overall emerging markets index ranged between 4.5% and 7.5%, outperforming all of the U.S. equity sectors.
Last week, SPX had its narrowest weekly range in 3 ½ months. It ended the week near 3185, about 50 points below its June high. After the recent five-week timeout, it wouldn’t be unreasonable for the index to push to at least a slightly higher recovery high. In the current set-up, there would be no cause for alarm unless and until SPX fell below its 200-day moving average currently near 3027. Coincidentally, SPX’s 50-day moving average is in the same vicinity, currently near 3033. One scenario that could play out this week that could be a cause for concern would be a slightly higher recovery high followed by a reversal. The June high was near 3233; a new high at say 3250 that is quickly reversed could be an early warning sign.
As I write this on Sunday evening, the number of new COVID cases in the U.S. has increased by 60,000 or more on each of the last three days. The state of Florida reported a record 15,000 new cases for Saturday. Still, stock index futures are trading modestly higher in early trading. As the markets reassess the economy’s recovery potential, one key could be the earnings guidance from reporting companies. The new earnings season begins this week with a heavy dose of big banks, some consumer staples companies and even a couple airlines.
|Tuesday 7/14/2020||NFIB Small Business Optimism Index||94.4||96.1|
|Consumer Price Index, June, M/M||-0.1%||+0.5%|
|CPI less Food & Energy, June, M/M||-0.1%||+0.1%|
|Wednesday 7/15/2020||Empire State Manufacturing Index, July||-0.2||8.9|
|Import and Export Prices, Import Prices, June, M/M||+1.0%||+1.1%|
|Import and Export Prices, Export Prices, June, M/M||+0.5%||+0.8%|
|Industrial Production, Production, June, M/M||+1.4%||+4.3%|
|Industrial Production, Manufacturing, June, M/M||+3.8%||+5.5%|
|Thursday 7/16/2020||Initial Jobless Claims||1,314K||1,323K|
|Philadelphia Fed Business Outlook Survey, July||27.5||20.0|
|Retail Sales, June, M/M||+17.7%||+5.3%|
|Retail Sales, June, less Autos & Gas, M/M||+12.4%||+5.0%|
|Business Inventories, May, M/M||-1.3%||-2.3%|
|Housing Market Index, July||58||60|
|Friday 7/17/2020||Housing Starts, June, SAAR||0.974mm||1.190mm|
|Consumer Sentiment, July||78.1||79.3|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.