We don't know what it says when we see Johnson & Johnson's (JNJ) stock go for a spurt on no news. We are mystified by the runs in Merck (MRK) and Pfizer (PFE) , because they are based on nothing happening at the companies. We could find individual drug approvals and point to them as catalysts: heaven knows all three, JNJ. MRK and PFE, have them regularly. But, when I peruse the news wires, there's no drug approvals of any consequence.
Still, the one thing we know to be the case? Only a recession would give you a rally of this magnitude. These stocks are predicting a recession, plain and simple. I don't believe it, but that's what they have always stood for.
I could say the exact same thing about the utilities. I had American Electric Power (AEP) , the biggest transmission company in our country, on last week, and while I would like to say that its stock just jumped ten points because of its excellent cost controls and above average customer payments because of renewed demand, all I can really point to is that rates have come down on the 10-year, and that drives this stock and its cohort higher. Recession.
Oh, and heaven knows why the consumer-packaged goods stocks are going higher, at least the ones with decent yields. They typically flag a recession, too.
And let's throw in the real estate investment trusts of all kinds. Their lift-off normally would signal some sort of recession on the horizon -- because of their higher-than-average yield, which won't be available from bonds.
But I think these stocks have all lost their predictive behavior. Sure, they are captured by the 10-year. However, I now think that this is simply rotational behavior 2018-style and it requires all new rules to live by.
First, I would say that there is an obvious correlation between the 10-year and these stocks. When rates are headed from 3% down to 2.5%, they are buys. When they are headed from 2.5% to 3%, they are sales.
We are in buy mode.
Second, these stocks no longer seem to correlate with the economy all that much, at least not any more than the 10-year, which seems to correlate with, well, nothing.
I think they really correlate with the flow of funds in the market. When we worry about world trade slowing, we do buy staples, including big pharma -- not biotech but big pharma. It is possible if the trade war picks up that worldwide growth will slow. But I think that the rally in the drug stocks is really about institutions being underweight a terrific group. Pfizer has outlined plans for a possible break-up.
Merck has Keytruda, which is a keystone anti-cancer drug. Johnson & Johnson has some fabulous potential blockbusters that aren't in the stock yet. Investors want stocks that haven't really moved that have the potential for good news. Consider that Allergan (AGN) , the most despised drug company at one point, has now gone from $144 in May to $190, with scarcely a single important announcement. I do think some could be on the horizon, though, or I wouldn't have liked it in the first place.
As far as the REITs: Sure, the retail REITs are better because of a cessation in bankruptcies. But the rest of the rally? I think it is ETF money in search of yield while real estate, including the malls, have, surprisingly, held up in value as the worst fears have not been realized.
So, rant and rave that this whole move has to be saying a recession is beckoning. To me, employment, retail sales, confidence -- they are all so high that a recessionary view seems fanciful even with all of the potential tariffs being thrown around.
I always want to be cautious on these moves. The action in these identical stocks from back in 2000 influences my thinking. They rallied and a recession was right over the hill they had just climbed.
This time? It's different. There's no recession; there's simply a rotation from one group that got expensive to another group that is cheap, no more than that. There's too much evidence of strength -- job growth, small business confidence, car loadings -- and if you overthink it and interpret these moves as a sign of a real slowdown, I believe you will cost yourself a lot of the money that you should be making if you weren't betting that the economy's about to roll over.