Saturday night might be all right for fighting, but Friday sure seems to be the preferred day for selling.
It has been a nice four-week stretch for stocks, one that has seen the S&P 500 index gain 1.5%, the Nasdaq Composite rise 3.7%, and the Dow Jones Industrial Average advance 0.2%. But one thing has stood out during this run—no one wants to load up on stocks for the weekend.
Case in point: This past week was pretty spectacular until it got marred by another ho-hum Friday. The S&P 500 rose 1.6% on the week, to 3380.16; while the Nasdaq gained 2.2%, to 9731.18; and the Dow Jones industrials advanced 295.57 points, or 1%, to 29,398.08. The Dow finished off 0.1% on Friday, however, its fourth-consecutive Friday decline in a row.
That streak might mean nothing. It might, after all, just be the random gyrations of an unpredictable market. We’re not so sure. Coronavirus continues to spread. Politicians continue to campaign. Would any pro really want to be placing big bets heading into a weekend that could see everything change again? “It suggests that investors don’t have high conviction,” says Chris Senyek, chief investment strategist at Wolfe Research. “Folks are just letting it ride.”
To some, that looks like complacency. We’ve heard the market dubbed “ludicrous.” We’ve seen the comparisons to the dot-com bubble. We’ve pointed out that stocks have almost never traded with valuations as high as they are now.
But investors may not be as complacent as they seem. Yes, they’ve decided to stay invested in U.S. stocks, but compare it with the other options. Emerging market stocks near the epicenter of the outbreak? Treasury notes with yields of just 1.59%? Cash? But they haven’t sat idly by, either. They’ve dumped the stocks most exposed to coronavirus and to a slowing economy—things like energy, cruise lines, airlines, steel.
“Investors react through risk and positioning, instead of pushing the S&P 500 down,” says Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. “They’re digesting information and trying not to overreact.”
That, of course, doesn’t mean there aren’t risks. Calvasina still expects it to be a turbulent year, and with coronavirus spreading and an election looming, it’s hard to disagree. S&P 500 earnings expectations, now about $176 a share, might be too high given the possible damage from the virus, which brings risks of its own. But there’s just as much risk to selling and watching stocks continue to run as there is in holding on too long. Even then, stocks have shown a propensity to bounce back quickly even after the largest drops.
“It’s hard when there’s nowhere else to go,” Calvasina says. “No one rings the bell at the bottom.”
Or at the top, for that matter. But we’ll worry about that when we get there.
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Here’s what else caught our attention this past week:
• Apple (AAPL) has gone nowhere since trading as high as $327.85 on Jan. 29. That was, of course, the last day pre-coronavirus. Since then, Apple has been bogged down by fears that the virus will hit its supply chain. No surprise there. What is a surprise, however, is that Apple hasn’t fallen much, despite being overbought at the end of January. The longer the stock trades sideways, the better the chance the next move is higher.
• Nothing has been able to stop Costco Wholesale (COST), which gained 1.5% last week. Its stock has generated positive returns including reinvested dividends every year since the end of 2008, generating a 20% annual return along the way. Every now and then, Costco gets downgraded, and the reason is almost always valuation. At 36.5 times 12-month forward earnings, Costco isn’t cheap. But it will take something more than a run-of-the-mill earnings miss when Costco reports on March 5 to alter its upward trajectory.
• The S&P 500’s real estate sector just had its best week since 2015, as the 10-year Treasury yield remained below 1.6%, and investors flocked to stocks that act more like bonds. But it’s not just dividend seekers who are flocking to real-estate stocks like Equinix (EQIX). The sector now makes up 11.6% of the iShares Edge MSCI USA Momentum Factor ETF (MTUM), observes Instinet’s Frank Cappelleri, while utilities, which hit an all-time high, are 12%, making them the second- and third-largest sectors in the ETF behind tech. “With rates low and the Fed still accommodative, it’s no wonder those areas are the top of the list,” he writes.
Write to Ben Levisohn at Ben.Levisohn@barrons.com