Big divergences in commodity space still favor Materials over Energy
One of the themes in our sector research for clients recently has been to focus on relative preferences within broader style or macro categories, rather than making big macro bets on Growth versus Value or Cyclical versus Defensive areas. We find that in a more range-bound market with conflicting macro trends, a more granular view is often more effective.
One stance we have held for some time has been within the Value-oriented commodity space. While in many cases historically the Energy and Materials sectors have moved together, this year has seen a dramatic divergence between the two commodity-related sectors. We have favored Materials over Energy this year, and still do, and below are some of the drivers of that view.
Housing has been strong, but mortgages are harder to get
By some measures, the US housing market has been extremely strong. Sales of new homes are up more than 30% year-on-year, as many people are seeking to leave big city centers and buy single-family homes in the suburbs.
However, the chart below shows some of the extreme and offsetting influences on the housing and mortgage markets right now.
Online shopping trends remain a key driver of equity returns
The growth of online shopping has been well-established for years now, but the pandemic has prompted an acceleration in that trend, which continues to be felt in relative stock returns.
The chart below shows the year-on-year growth rates of total US retail sales and online retail sales (non-store retailers) over the last five years (based on monthly retail sales reports from the US Census Bureau). We can see that online sales have been growing significantly faster than total sales the entire time, and most notably, are now near their highest growth rate (20%+) even as total retail sales dropped sharply earlier this year and are currently roughly unchanged from year-ago levels (indicating that non-online sales are down from a year ago).
Putting the Fed’s balance sheet in perspective
Along with fiscal stimulus, the aggressive support of financial markets by the Federal Reserve (and other central banks) has been a key to the gains in risk assets since April. In our view, stock and bond prices would not be as high as they are if not for the perception that the Fed will step in with additional support if markets get too volatile. This perceived “Fed put” is on top of the ongoing bond buying programs (excluding the immediate post-COVID surge) that are currently running at a rate of about $80 billion per month for Treasuries and $40 billion per month for mortgage backed securities, though some of this replaces expiring bonds.
Tech Sector In The Driver’s Seat For US Relative Performance
In this post, we highlight the interaction of US outperformance versus the rest of the world this year and US Technology relative to Ex-US Technology.
First, the relative performance of the US equity market versus the rest of the world has been highly correlated with the relative performance of US Technology stocks relative to Ex-US Technology stocks.
Second, the outperformance of US Technology, and by extension the major US indices versus their non-US counterparts, looks likely to continue based on relative earnings estimate revisions patterns.
Does The NASDAQ-100 Correction Have Further To Go?
The NASDAQ-100 Index (often known by its ticker symbol, NDX), home to many of the mega-cap Tech-related Growth stocks that have dominated the US stock market this year, has seen some corrective action this month. A common question we hear is: is the correction enough to say the NDX is no longer “stretched” after its historic surge through the end of August?
The chart below provides some context. For four different indices, it plots the percentage difference between the current index level and its 200-day moving average, a common measure of the longer-term trend. Excessive deviations from the 200-day average are often viewed as signals of extreme investor behavior that are likely to revert back toward the average.
Growth leadership easing as rotation increases
One of the most notable market trends in recent weeks has been the corrective action in the formerly high-flying US large-cap Growth stocks. The dominant Tech-oriented companies that have been responsible for much of the gains in US large-cap indices for several months finally saw some significant selling pressure in the first two weeks of September.
The first chart below shows absolute and relative returns for the S&P 500 Pure Growth and Pure Value indices (i.e., the style indices restricted to stocks that fall entirely into their indicated style, leaving out those with weight in both indices).
Is the rebound in earnings estimate revisions peaking?
Our measures of aggregated earnings estimate revisions trends have shown some of their most dramatic movements on record this year, and now may be looking extended.
After reaching historically extreme negative readings in April/May amid the initial COVID-19 lockdowns, earnings estimate revisions activity has now lurched back up to extremely positive readings. Better-than-expected Q2 earnings reports and the effects of massive monetary and fiscal stimulus are now finally reflected in analyst earnings forecasts. However, with fiscal stimulus weakening (and little imminent sign of movement toward new stimulus) and no meaningful further scope for interest rate cuts, the “snap-back” in earnings estimate activity could soon drop off.
Unemployment is still a huge issue
The latest weekly report on unemployment claims was released yesterday and provoked mixed responses depending on how the data was (or was not) analyzed. While unemployment claims data is not a perfect measure of the national job market, it is one of the most timely measures and gives a good picture of what is going on (though long-term comparisons can be difficult). Recent methodology and seasonal adjustment changes along with reporting of state-only (not federal) claims data have caused some confusion among investors.
The S&P 500 is top-heavy, but so are fundamentals
There has been much discussion about the increasing concentration of the market cap weighted indices in the US, with the S&P 500 now showing some of the highest levels of concentration among the largest constituents in history. The top 20 S&P 500 stocks (4% of the constituents) currently comprise 38.6% of the index weight, while the top five companies alone make up 23.8% of the weight.