Trying to figure out if Wall Street’s showing some bargains? You’re not alone. Amid all the negativity associated with recession talk and oil’s lurches up and down, a rapid market upturn is silently waging a battle against the pessimism in Lower Manhattan. The situation begs the question: can you recollect days when the market shot up on good news (real good news, not the bad-news-is-good-news type of news)? It may be hard to, compared to the flash crashes, multi-hundred-point losses and high-volatility days that tend to etch quickly in our minds. In other words, the 14% drop for the NASDAQ this year remains pretty vivid, but in my opinion, investors may not be giving due credit to the stealth rally under way; the same index is up over 6% since its low in barely 7 trading days. Are the fundamentals in better shape than investor sentiment may feel? It’s a difficult question to answer, but surely there are some reasons for optimism. Here’s my take:
The sector winners are showing resiliency: During the downturn from the beginning of January that bottomed February 11th, the sector winners were telecommunications, utilities, and consumer staples – the usual risk-off equity shelters with their dividends, non-cyclical nature and relatively stable cash flow. Nothing new there. Industrials, however, fared not nearly as bad as one would think considering the prime reasons for Wall Street’s worries revolve around overseas uncertainty and commodity pressures; as of Feb 22nd, the industrials were only down -3.7% YTD, outpacing the S&P 500, which is down 6.2%, and even consumer discretionary and healthcare stocks. The DJIA, in fact, has outperformed both the S&P 500 and the NASDAQ YTD – an interesting argument in favor of multinational strength at a time when investors assumed that the US was doing well and the rest of the world wasn’t. Alongside, note that last week was the market’s best performance in 2016 – the indexes were up roughly 3%. Who were the winners? Technology, up 4.1%, followed by consumer services, up 3.8%, industrials, up 3.4%, and healthcare, up 2.7%. As a result, investors don’t seem to be averse to any specific sector – and nor is this recent equity upturn being driven by the safer ones. In my opinion, these are all fundamentally strong signs regarding market resilience.
Gold’s not all about fear: Gold presents another interesting case. As a well-known risk-off trade, gold, represented by the SPDR Gold Shares (GLD), is up 14% YTD – understandably so, given 2016’s carnage that led to corrections in US stocks and bear markets abroad. At the same time, January’s CPI data was quite positive; the fact that inflation was unchanged amid an oil collapse of roughly 20% was in favor of rising inflation. Core CPI, meanwhile, was up 2.2% since a year earlier – the highest rise since June 2012. The Fed may be on to something. Alongside safety, gold is also used as a hedge against inflation. It’s possible that a portion of gold’s performance in 2016 can be attributed to expectations of higher inflation, and not just investor fear.
Growth is getting rewarded: As much as momentum stocks were hammered in January, look! They’re back! Facebook (FB), is now flat for the year, Shake Shack (SHAK) is only down 2.4%, and Amazon (AMZN) and Netflix (NFLX) have both shot up from their recent lows, down 20% YTD, but really not bad after counting their stellar performance in 2015. The NASDAQ Composite, as a whole, has rebounded 6.6% since February 11th. Things may not be all that bad given that in a low-growth world, the fact that investors are willing to get back into high-growth, well managed disruptive companies at the sign of market upturns shows optimism.
The dollar is holding steady: An appreciating dollar was meant to pose headwinds to multinationals in 2016. However, YTD, the WSJ Dollar Index has weakened by 1.2%; the dollar is off 2.7% against the yen, and 2.4% against the euro. Sure, this may change if rate hikes get back on the table or things abroad go downhill, but in the interim, companies with international revenue streams can breathe easy. Alongside, while the dollar’s gain in emerging markets isn’t exactly news, the main emerging markets it has lost value against are Indonesia and Thailand; at the same time, these are also the only countries that have positive indexes YTD among their peers. Consequently, some international markets may be more resilient than Wall Street thinks.
And, rounding it off with politics: Last week, Barron’s and the WSJ both highlighted the impact of Bernie Sanders and Donald Trump on the markets. Sanders’ polling in Nevada, however, is likely to reduce Wall Street’s worry for the time being – another positive albeit minor sign for equities. That being said, let’s note that activities across the pond are likely to bring back some of the anxiety; the Brexit just got a lot whole lot more curious with London’s Mayor, Boris Johnson, now opposing PM David Cameron’s EU-friendly position. Wait and watch this subject – things will become clearer as the June 23rd referendum comes closer.
What it means for you: When times are tough, investors can easily feel down and out. However, the reasons matter. Since February 11th, Wall Street has rebounded significantly; earnings season has also ended, with 68% of firms reporting earnings above their mean estimates (FactSet data). Granted, oil’s volatility isn’t going anywhere – and nor are the financial sector woes…so the cautious environment and hurdles will continue to exist. However, several indicators suggest things may not be all doom and gloom. Follow the details beneath the headlines and consider the long term as investors figure out their direction on Wall Street this week.
