The market is supposed to take its cue from the economy's future. I like to think that stocks look out about six months -- which is how I fashion my worldview -- and that you have to try to anticipate what will work in that timeframe and what won't.
Lots of times it is self-evident. We can expect that companies that can grow and thrive will be rewarded with a higher price-to-earnings multiple for what turns out to be that better bottom line. We need to find those stocks, virtually hunt them down, and buy them in a style that allows you to get the best prices possible.
This market, however, does not lend itself to that kind of divining. This market is far more like a horse race, where there can be only one winner. But it's a long race, and I feel that all that's happened is we are at the far turn, still far from the home stretch and it's anyone's game to win. Know this, though, it's a lot of horses' game to lose and that what is so worrisome.
The first group? A subset of the Cramer Covid Index, the tech stocks that make it so it's easier to work at home and play at home. We can include everything from Zoom (ZM) to Domino's Pizza (DPZ) or even Papa John's (PZZA) , which put up same-store sales numbers in the unheard-of 33%.
Second group? The recession-proof stocks, mainly food and cleaning supplies for your home and for yourself, staples that have become more important than ever because of the shelter-in-place rules, rules that are now ending.
Third? The industrials. The companies that manufacture things, whether it be chemicals, or paper boxes, or machine tools or steel or aerospace.
Fourth, the beaten down nag that represents travel and leisure, airlines and tourism.
The fifth horse? Drug stocks, especially drugs that are on the hunt to conquer Covid-19.
Sixth: retail and restaurants, the once forbidden fruit that are now open for business.
Seventh, pure tech, the semis, the software and the cybersecurity names.
The eighth horse, home and home improvement.
Ninth, the financials, especially the non-fin tech banks.
And finally, 10th -- hey it's a crowded field -- FAANG: Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet (GOOGL) , hybrids that trade together because of stupid exchange-traded funds that firms put together to make a little cash.
What's incredible is that this is some long race, longer than the Belmont Stakes, so long that it's a multi-quarter affair. So, there's plenty of jockeying, but there can be only one winner. Remember, I said that stocks predict the six-month-out future so this is a gigantic number of furlongs, just to even get to the far turn, let alone the homestretch.
Sure, you can make a field bet, bet on every horse, namely the S&P 500, because you want to capture the returns from the good and bad horses. But this is a winner take all race and the S&P simply doesn't make as much money as identifying the win, the place and the show. It's possible that there are horses, right now, at this very minute, that are in the lead that could finish dead last at the conclusion of this sixth month period.
So who is in the lead right now? We've got the industrials in first, the banks second, the travel and leisure stocks in third, retail and restaurant in fourth and technology coming in hard at fifth, helped by a midday preannouncement by semiconductor giant Micron (MU) and housing in fifth. It's a close pack and it should be because right now, this track belongs to all of the companies that do well in a low-rate environment where the future looks brighter than the past.
It makes sense. We hear from the industrials that things aren't dire as they seemed not that long ago. The banks? Jamie Dimon, the dean of the banks, just told us Tuesday that we could be in for a quick recovery, a staggering possibility just a few weeks ago when we were debating which letter recession we are having: a "V," a "U," an "L," a "W" and we ended up with an unencouraging swoosh. Travel and leisure? When you hear about theme parks opening, when beaches are packed, it's time to get out, get on a plane and go virtually anywhere. It sure helps when the group's jockey, Doug Parker from America Air (AAL) , says the worst is over. Oh, and there's cruise lines, with their unsinkable numbers, numbers that wouldn't even exist if the Fed hadn't backstopped credit.
Retail and restaurants? Easy enough to predict. With the exception of a couple of outfits deemed essential, these places have been shut down since the pandemic became, well, a pandemic. Tech? It wasn't going anywhere until Micron pre-announced midday and that ignited a bunch of the industrial oriented chip stocks.
Housing's soaring, because rates are low and there's a counter-urban trade left over from the desire to flee Covid hot beds.
Now, what makes this race so hard to figure is the stay at home stocks are very much in the pack with those incredible numbers from Domino's and Papa John's. The recession-proof food and non-pharma drug stocks are hanging in, but have no oomph. The drug stocks? Not so hot. And without a Covid cure leader, the group has dropped behind by a considerable number of furlongs. Last, FAANG, which is either biding its time or is a bitter disappointment.
I know how it looks. The lead horses have two things in common, a belief that because the Grand Opening of our country is going so well, and because we have accelerated the timetable for a vaccine, you have to abandon safety and just go all in.
The laggards? They are losing, because who needs to be in the steady Eddie stocks, when we are about to blast off. Anything great, like that of Domino's or Papa John's is dismissed as the last good months; it's all downhill from here.
Funny thing, though, I think the field is going to be spread out by the time we get to the homestretch and many of these so-called winners will drop behind. Why? Because bettors seem to be confused. It's one thing to think you are going to conquer Covid-19 and therefore the economy will be great. It's another thing entirely if you open up the economy and things are better than before, but you haven't conquered the biggest issue in the race: the unemployment rate. Every horse in that front pack requires both Covid-19 to be conquered and the economy to create new jobs. Neither is by any means a sure thing, although we seem to have been able to prove the scientists wrong so far about what happens if you don't obey social distancing or wear masks. They seem almost antiquated.
That's why I see the winners being the techs that help you stay at home -- even though we are going back to work at the office it will never be the same again as companies saw how much money they could save, especially on travel. And, of all things, I see FAANG, which do best in a slow economy, as something that I still bet we have, precisely because yesterday's and today's market seem to ignore the inevitable: What happens when the bountiful unemployment benefits and Paycheck Protection run out and the small business bankruptcies begin?
Look, I want to believe that the current leaders all cross the finish line together. It would be a Cinderella story. But there's only one Secretariat, and that's FAANG, and even as it's in last place now, if the window were still open, it's whom I would bet on.