Market players were surprised on Monday by robust gains in the market. There were several explanations for the action including progress on Covid-19 drugs, positive comments from Fed Chair Jerome Powell, and optimism about reopening the economy. While the headlines provided some convenient explanations for the huge gains, the main reason for the strength was simply the fact that most market players simply weren't expecting the move.
The most notable characteristic of the market over the last couple of months is the disconnect between the economic outlook and the price action of the indices. Even with the unlimited help provided by the Fed, many market players just can't embrace the idea that the market can so easily overcome the worst economic situation since the Great Depression.
It isn't just individual investors that harbor doubts about how quickly recovery can take place. According to UBS, just 10% of fund managers say they expect a V-shaped recovery, while around 75% expect a U or W shaped recovery in the economy. This current move is widely viewed as just a very sizable bear market rally and that is why there are moves like yesterday when so many market players are caught out of position.
Another aspect of the action yesterday that complicated matters was that there was a rotation under the surface again. Recently the market upside has been driven mainly by growth stocks that are viewed as the leaders in the post-pandemic world. Growth stocks such as financials and industrials have lagged as they are viewed as being laggards as the economy finds its footing.
On Monday, money rotated out of stocks that benefit from Covid-19. Even the FAANG names lagged as the value names finally found a bid. Whether this is a sustained theme at this point we will have to see but there is no question that there are two major components to the current market and the rotation between the 'new' economy and 'old' economy names will be a long-running theme.
The earnings report from Walmart (WMT) just hit and is seeing a strong positive response that has the indices off their early lows. March same-store sales were up an amazing 15% and it is obvious that the company is a major beneficiary of the coronavirus crisis. This is all part of the 'new' post-pandemic economy and is a theme that is going to last longer than many investors might believe.
My game plan here is to stay focused on stock picking and to try to navigate the rotational action. I'm not too concerned about index action. The S&P 500 is over recent highs but I'm looking for trading range action to continue to develop.
This market is all about positioning. If there wasn't so much skepticism, there wouldn't be so much strength.