When investors talk about markets being bullish, one cannot help but chuckle given that if one just focuses on the S&P 500, their view of the world is very different than if they looked at all the other broader indices. S&P 500 is down 3.6%, Russell 2000 is down 14%, Banks Index is down 31%, only the Nasdaq is up 16% year to date! If one were to go back two years to 2018, stocks have essentially gone nowhere, barring the performance of five stocks, namely Amazon (AMZN) , Netflix (NFLX) , Alphabet (GOOGL) , Microsoft (MSFT) and Apple (AAPL) . As the market recovered from its massively oversold lows in March, the only sector that is making new highs and outperforming over the past month has been Technology. Technology is the new safe haven "bond" proxy. Given the Fed has pretty much made the U.S. bond market a joke with being the buyer of last resort and indirectly capping yields in the back, Technology has taken its role.
For the past month, the markets may have been range bound between 3050 and 3200, and sector rotation has been key to generate any performance whatsoever. Energy, Banks, Industrials, Retail and others, have all underperformed vs. the likes of Technology FAAMNG. The only way for the S&P 500 to make new highs is for the remainder sectors to take the baton from Technology and do some of the heavy lifting as well. This is defined as the classic Cyclical over Defensive trade, Value over Growth. Despite it being cheap, cheap can always get cheaper. To call the value stocks to rise from here, one needs to forecast a full blown economic recovery, not just money thrown at the problem to support asset prices. The Fed can print tons of cash but unfortunately they cannot print jobs nor economic growth. They cannot force companies to hire back workers. Nor can they make inventories disappear.
Technology stocks still have balance sheets with $100 billion+ in cash and are able to arb the system by taking on even more debt at marginal rates to invest back in the company at much higher returns. The bigger ones get the best funding, while the smaller ones go bust. That is the law of the jungle and the big will survive. They still have earnings growth of 20%+ despite their PE being closer to 30x+ even. Where else is the growth going to come from? If you look at Energy sector, the oil price still has massive amounts of oversupply of 400 million barrels it needs to work through before even calling it a tight market. Not to mention 9.7 mbpd OPEC+ oil sitting on the sidelines and on floating storage waiting to come back. In that sort of an environment, the Energy sector will not see earnings growth. In fact, it will see its dividend and buyback capacity diminish as companies try to survive cutting costs and growth altogether. The Retail and Industrials space have their own problems. Financials are much better capitalized but with their loan books are exposed to yet another housing crisis from deferred payments and flat to negative yield curves. Bank stocks look capped here for now as well.
If one believes we are in a true economic recovery, then those sectors can rally. But we have seen evidence far from that. The bounce in economic data from April was bound to be positive. Anything from 0 is positive! With 20+ million Americans out of jobs, chances of unemployment benefits running out at the end of July, and companies not just furloughed workers but letting them go permanently, the economy is going to lose $300 billion-$370 billion in consumer spending, according to the CBO, by the end of 2021. U.S. delinquencies have risen to highs not seen since May 2009. If consumers miss more of their payments and do not get a job, this has implications for the housing market, which could be another canary in the coal mine.
This time it is different. The Fed has our back and has done an unprecedented amount of QE. They injected about $3.7 trillion into the economy (asset markets) in a matter of three months. This has helped fuel asset markets - let's not call it anything else. But they have stopped now. Why? Perhaps they realize that they need to take their foot off the gas as rising budget deficits are a huge concern. They can do more QE or perhaps even yield curve control, but all that can only be justified if the market falls down to 2600-2900 and scares the living daylights out of them.
As economies are slowly reopening, life will not return back to normal as it was in January. Investors will make choices, but travel and dining and entertainment will not be the same. It will pick up, and be muted. This has implications for oil demand, especially given all the oversupply still in the system. Sector rotation is key as one can make money even in a flat tape. But this is not the time to be naked outright long.
When teenagers and momentum traders dwarf hedge funds with chasing illiquid trades and beating the market claiming "how easy trading is", alarm bells should ring. There is too much complacency in the market. Investing is about risk vs. reward. Today from these levels without Fed support, the risk seems down into summer, especially in cyclical stocks. Growth has been outperforming Value and will probably continue to do so for now.