The mindset's pretty amazing. When the market goes down like it did today there's only one thought: Good, now I have a chance to get in. In the old days, we would see sessions like this and say, oh boy I got to get out when the getting's still good, before the big rollover. Now we see it as an opportunity that shouldn't be squandered.
What's going on here? Can it be as simply as FOMO, fear of missing out? No, I think it's because we've broken the tyranny of the indexers.
For the longest time the "market" traded pretty much in unison. The S&P 500 would go up on the Fed saying something positive about the need to keep rates low. The market would rally if we got a solid employment number with low wage growth. A casual comment from the Fed about the possibility of the need to tighten would crush the S&P. A good Capitol Hill presentation by the Fed Chief, one where he said that things are just fine, no need to raise or lower rates because inflation is under control, could send the S&P soaring but a potential collapse in the European bond market or the inability of some foreign banks to roll over some debt could cause the S&P to have a paroxysm of pain.
No more. That doesn't happen. That's because individual stock buyers and to a lesser extent, ETF buyers don't react to these big macro events. They react to opportunity and that means when stocks come down they don't come down in those horrid waves that have dominated stocks for 20 years.
I know it's hard to believe but there was a time when individual stocks and individual sectors mattered greatly. When I taught stocks at Goldman I would say that 50% of a stock's move came from what a company did, how it executed, what it earned, and 50% from its sector. We didn't even count the S&P as a factor. I once was working with a wealthy individual who ran a shoe company and ran it well, so well, that it got into the S&P 500, just like Tesla (TSLA) got added the other day. I thought the CEO would be thrilled. It was the opposite. This was 30 years ago, mind you, but he said that he was livid about it. I was taken aback and said how could he be upset. He told me that because one day what he did wouldn't matter if his company was in the S&P 500. If the broad funds that run money used the S&P 500 bushel to make all of their investments and decided that stocks were too high and banged them down his stock would go down with it. If the S&P kept getting hit then his company, which did not have multiple classes of stock, would be snapped up on the cheap.
And wouldn't you know it? That's exactly what happened as the gravitational pull of the S&P 500 overwhelmed the 50% of the price appreciation that was up to the company and 50% that was the cohort, and caused his stock to go so low that it got a bid for fraction of what it should have been worth.
This market, with its new young buyers, who know companies not indices, are bringing back some of that 50% of the valuation that was determined by how a company did. The other 50% is being provided by the myriad ETFs that capture the sector gain.
Where did the big fund managers go who think individual stocks are too small for them to trifle with? I think they have dwindled in numbers replaced by buyers of the S&P 500 themselves. These index buyers are still around and in some ways can be bigger than ever. But here's what's amazing about them: the money seems almost one way. People are not trading the S&P 500, they are using it as their principal way of saving given interest rates are so low. If you are trying to get income you can't use bonds. You have to buy stocks that have decent yields. You can reinvest the dividends and compound at a far better rate than you could ever do if you own any bond of any vintage. More important, many of our companies can arguably be considered far more solvent than our own government now that it has had to spend so much money to help people in the pandemic. So those who seek income are going to stay in the S&P and they are a terrific safety net that the S&P futures short sellers are pretty sick of getting wrapped up in.
Believe me it's a big issue. Michael Cembalest, my favorite strategist in the market, wrote a devastating piece today talking about how the armageddonists have lost their way, those who have called for gigantic selloffs have just been crushed and, no doubt, have had lots of money taken away from them. That large-scale bearish money, run, again, not by shorting individual stocks but by shorting the S&P 500, are getting their heads handed to them endlessly to the point that it's a miracle they have any money left to run.
In their place are people who want to own broad themes. You can get an ETF for pretty much anything these days, whether it be semiconductors or gaming or cloud or cloud security or drug or biotechs, and so many other sectors. Candidly I am not a fan of these ETFs because they own the good with the bad, but many of the stocks are pretty good. And it's hard for me to really knock them because I came up with FAANG, which is the essence of a whole bunch of ETFs which is why Facebook (FB) , Amazon (AMZN) , Alphabet (GOOGL) , Netflix (NFLX) and Apple (AAPL) tend to trade together.
Lately, though, there has been a move to own individual stocks by younger people and newer investors who seem captivated by individual stocks because of the enticing nature of no commissions. I can't stress how important the lack of commissions has become to this market. It's had the further impact of minimizing the S&P 500 pull and returning the importance of the actual company's execution.
This isn't a new phenomenon. It's a return to the old days when individual company's management's efforts are rewarded. Every day we have the stocks of companies on the move because of what a company does and how well management handles it. You get a big spike in Covid cases? You know that Zoom Video (ZM) will do well. You believe that electric vehicles are here to stay? Then you buy Tesla. Or Lordstown (RIDE) . Or Fisker (FSR) . You think that the vaccines are on the horizon? Then you buy the cruise ships or the airlines. 5G going to be big? You buy Qualcomm (QCOM) . Autos get stronger? Just go buy Ford (F) or GM (GM) . You want retailers, then you want the best retailers because 50% of a stock's performance is the company and 50% is the sector, which means buying Target (TGT) which did the best of all the retailers that just reported, or Costco (COST) for its consistency and its special $10 dividend.
I know that it seems strange not to see everything go down or up at once. But I think that as long as interest rates stay extremely low and as long as individuals aren't brainwashed into thinking they are too stupid to pick individual stocks or even sectors, then you are going to get days like today where disparate groups rally or retreat. In the end it isn't an anomaly, it's simply a delicious throwback to where homework on individual stocks still mattered.