 |
| The Bears certainly wrestled back control of the narrative from the Bulls in September! Or did they? |
Since late June, the stock market has been an unstoppable juggernaut, with the S&P 500 mostly cruising upwards to new heights. That is, at least, until early September, when things began to grow downright ugly and some investors were seemingly caught off-balance by the vehemence of the selloff. The bears certainly got revenge for the bulls trampling them over the last several months as the S&P 500 briefly saw all of 2020’s gains erased. Breaking it down further, we see that the S&P 500 and Nasdaq fell -3.9% and 5.2%, respectively. This was not a pleasant month for anyone, but this selloff was more nuanced than it appeared on the surface. Let’s dive into some of the trends behind the headlines!
Prevailing logic following the immediate selloff panic around the coronavirus-related shutdowns (March and April) rightly decided that Big Tech companies are more or less fortresses, staying profitable and generating positive cash flow regardless of social distancing measures. Some of these companies were also perfectly positioned to grow (think Amazon with its domination of online marketplaces). Therefore, in the following months, even as some other sectors sold off or were bought up, tech remained a crowded trade among investors, all clamoring to own a safe piece of the action. August saw tech names move sharply higher – diverging with underlying fundamentals, some might say, to become quite expensive by traditional metrics – as some unknown entity snapped up large quantities of options contracts in large technology companies (the option whale was finally outted as none other than the Japanese company Softbank. Read about the bet and a decent analysis of the option market activity backdrop at the Financial Times), which may have helped drive the companies’ near-term paper valuations still higher.
This is where things get interesting since the FAANG companies are represented in both the S&P 500 and the Nasdaq- meaning that as the companies’ combined market caps have expanded, they gained additional influence over BOTH indexes. Indeed, the tethering between the S&P 500 and tech companies has never been stronger (raising interesting questions for one to ruminate over like “Am I truly diversified?” or “Is my stock market bet on the S&P 500 too dependent on Big Tech?”). On many September down days, The Ignorant Investor saw the S&P 500 declining even in the face of relative strength from some of his own favorite non-tech companies. Of course, profit taking was also a big part of the equation, as investors sold expensive tech names and reinvested the principal and gains in the beaten down reopen trade.
Okay, that IS interesting, but what can we expect in coming months?
Going forward, in the game of maximum return over the medium term, the story shifts from who is safest in the event of absolute disaster to who will benefit the most once a treatment and vaccine are approved by the US FDA (and make no mistake, this will likely happen in the first half of 2021). The economic picture so far is indicative of what was widely expected: a K-shaped economic recovery in the United States, where some sectors and industries recover much faster than others while other sectors and industries may never fully recover (i.e. return to what they looked like pre-coronavirus shutdowns). As always, some people will benefit more than others.
Oh, and while we’re looking in the crystal ball, let’s not forget that the market is increasingly exposed to political risk around economic, regulatory and tax policies as a result of the upcoming US presidential elections- even as Congress punts a second round of stimulus around in their own private game of political football. And has a second round of the coronavirus already hit US shores? Will the USA be forced to lock down portions of the economy again? As should be expected from 2020 at this point, uncertainty from multiple directions will continue to buffet the US stock market.
It’s always a good idea to keep in close contact with your financial advisor and together develop a buy list of indexes or companies that fit your investment strategy. After all, this makes it easier to jump into the market and take advantage of the situation when you both feel the time is right. And as always, be sure to focus on quality over quantity (another way of saying diamonds in the rough continue to abound in the current market)!
Notable Stories from September
For brick and mortar retailers, the struggle has been for survival
This has been a difficult six months for retail companies. The Ignorant Investor has some long-term holdings in retail names that have thankfully been well-run enough that they will have no difficulty seeing better days ahead (several have even provided nice gains due to accelerating online sales). Not so with many others that were already struggling to fit in with the current fast-fashion trends and changing lifestyles of increasingly moneyed millennials. Opportunities may abound for survival stories, but the retail landscape has been forever changed as many companies disappear into bankruptcy- only a select few of which will be or have been "rescued" through private equity deals. The Wall Street Journal has a good article on the extent of US retail bankruptcies in the first half of 2020 here (note that a subscription may be requested).
Regional bankruptcy statistics are staggering
This year’s GDP declines came as no surprise to experts and actual data has been less bad than many had initially feared (yes, we again find ourselves in the place where bad news can be good news if it isn’t as bad as we expected). One big takeaway from close examination across many different metrics is just how severely the economic shutdowns affected the service sectors of the real economy. Since the time of the shutdowns, an uneven recovery has reared its head just as talk of a “Second Wave” of the coronavirus comes out of Europe. Bloomberg has a great article with a succinct title that discusses the dire situation for regional businesses: “New York Region Sees 40% Bankruptcy Surge…”
Wells Fargo has some portfolio suggestions for the US Presidential Election
In 2020, the presidential campaign has been unusual because of social distancing as well as extreme political rancor that, in all honesty, has no place in a modern society (civility, even in disagreement, should be a hallmark for a truly successful society). Be that as it may, some companies will benefit more from one presidential candidate than the other due to policy and regulatory differences. Wells Fargo took it upon themselves to come up with a Trump portfolio and a Biden portfolio, which CNBC has covered here.
Nikola: a counterpart to or counterfeit of Tesla?
In the realm of companies behaving badly, which has been a topic of ours for some months now, let’s briefly touch upon Nikola: a publicly-traded company with no vehicles ever produced that promises to create cutting edge electric vehicles that briefly reached a valuation exceeding that of Ford (which actually makes vehicles). Over the last several months, the company signed a $2 billion deal, with General Motors no less, before the company’s stock sold off after the founder and chairman Trevor Milton came under withering criticism from a short seller accusing the company of fraud- literally drawing comparisons between Mr. Milton and his company to, *gasp*, Elizabeth Holmes and Theranos, no less. The Ignorant Investor follows the story with some passing interest in part because of Nikola's background as a SPAC. In any case, a tabloid seems to be a great place to follow along with this saga, and the New York Post has a great article summarizing the Nikola story here.
