If the world feels more mixed up than usual, take comfort in the fact that the stock market is reflecting that confusion—and holding up just fine.
It may not have looked like that on the surface. The Nasdaq Composite gained 0.8%, to 11,671.56, this past week, while the S&P 500 index rose 0.2%, to 3483.81, and the Dow Jones Industrial Average advanced 0.1%, to 28,606.31.
That the market finished the week higher was impressive considering the news. There was a spike in Covid-19 cases in the U.S. and abroad; two Covid-19 trials, Johnson & Johnson (ticker: JNJ) for a vaccine and Eli Lilly (LLY) for a treatment, were paused for safety reasons; jobless claims unexpectedly shot higher; another stimulus plan remains elusive; and there’s an election that’s less than three weeks away.
Any of those on its own could have been a reason to sell, and yet the market held up. “The market is in a bullish mood and wants to stay that way,” says Dave Donabedian, chief investment officer at CIBC Private Wealth Management.
Still, the week wasn’t as clear-cut as the gains—what there was of them—suggest. On Monday and Tuesday, the Nasdaq outperformed the Dow by 2.2 percentage points, as investors scooped up tech stocks and shunned more economically sensitive fare. Then they pivoted back to cyclical stocks, as the Dow outperformed the Nasdaq by 1.4 points over the last three days of the week, suggesting a rotation back into cheaper stocks and away from expensive growth.
There were even rotations within rotations. On Wednesday, the Energy Select Sector SPDR exchange-traded fund (XLE) gained as much as 2.8% before finishing the day just 0.4% higher, while the Technology Select Sector SPDR ETF (XLK) dropped as much as 1.3% but finished off just 0.4%. By all appearances, investors can’t decide what they want to buy and what they want to sell.
Normally, this kind of indecisiveness would portend an unhappy ending—it did for Hamlet, at least. But for the stock market, it might actually be good news. That’s because investors aren’t selling stocks wholesale to reduce risk in the face of the mixed data, and uncertain outcomes. Instead, they seem to be trying to puzzle out the correct positioning, whether it’s a Donald Trump or a Joe Biden win, a spike in Covid cases or a successful treatment, or a slowdown in the economy versus an acceleration.
All that changes day by day, so the result is market oscillation, says Peter Kenny, an independent equity strategist at Kenny & Co. “Investors aren’t reducing risk by selling the market,” he explains. “Cautious investors are saying, ‘I love the market,’ and going where there’s greater perceived value.”
Exactly where that is remains a point of contention. Cyclical stocks are no doubt cheaper than growth stocks, and long-suffering value investors insist that the group will have to outperform someday.
For a moment, that someday appeared like it might be now after highflying software company Fastly (FSLY) issued downbeat guidance. The reduction in revenue wasn’t enormous—just 5% or so—but the reaction from the stock was enormous: Its shares fell 27%. Yet even after tumbling, the stock ended the week up 322% in 2020, and trading at 17 times sales, more than seven times the S&P 500’s 2.4 times.
Still, it’s too early to read one company’s pain as an omen for all tech, especially since the Nasdaq’s rise has been driven not by puny software companies—no matter how richly priced—but by Apple (AAPL), Microsoft (MSFT), and Amazon.com. (AMZN), which together with Tesla (TSLA) have accounted for half of the Nasdaq 100’s 2020 gains. “While we think the time to rotate is growing closer, we do not agree this Fastly guidance cut is a canary in the coal mine that signals the end of tech’s outperformance,” writes Tom Essaye, author of The Seven Report newsletter.
Thankfully, picking a side doesn’t have to be a long-term commitment. Wolfe Research strategist Chris Senyek, for instance, contends that the market is too optimistic about everything from Covid-19 trends, economic data, and what a Biden would mean, while monetary policy continues to favor growth and momentum stocks. That being said, he launched a “renormalization” basket, which includes beaten-down stocks like Walt Disney (DIS), Wynn Resorts (WYNN), and Vail Resorts (MTN), among others, that investors can use to take advantage of these swings.
“Positive vaccine news flow and choppy economic readings are likely to lead to several short-lived ‘renormalization’ trades that favor some of the most beaten-up subsectors and companies,” Senyek writes. “Importantly, we view this basket as a trading vehicle until it appears that the growth outlook will sustainably improve.”
When in doubt, trade away.
Write to Ben Levisohn at Ben.Levisohn@barrons.com