Thoughts on the Market. Stock Updates Tomorrow
With so much going on in the market I wanted to share some of what’s running through my head today, then keep tomorrow’s Weekly Update focused mostly on stock updates.
Yesterday’s big rally in the Nasdaq was enough to reignite bullish spirits but it was not a clear signal that it is time back up the truck on growth stocks just yet. While I side with those who say the pullback has opened up opportunities for fresh buying in many beaten down names and think it’s fine to pick up shares of some of ours stocks, I also think the chances of a snapback rally in many of the highest multiple growth stocks, then a follow through to new highs within a few weeks, is unlikely.
More likely is a period of churn as investors continue to play musical chairs with their dollars and seek to diversify into more value/cyclical plays. It’s a good time to be somewhat conservative, look for the fat pitches and be selective with new buying. Patience will pay. It’s also a good time to consider lightening up on positions that seem to have lost their mojo or which you’re just plain nervous about.
A few thoughts …
On yields: There are plenty of analysts who think the 10-year can go higher, to a range of 2% to 2.5%, in the 2021 to early 2022 time frame. While that scenario seems like it could be bad for growth stocks given what we’ve experienced in the last three weeks, context matters.
Yes, rising rates can hurt these types of stocks in the short-term but over a rising rate cycle growth stocks have tended to do very well. The reason is that, generally speaking, rising rates signal a healthy economy.
I pulled weekly index returns during periods of rising rates dating back to 1995. That table is below. As you can see it has not paid to bet against growth stocks during these periods of rising rates.
Caveats?
The periods above are measured in years, not weeks. The market does not like it when yields blast higher.
If yields continue to shoot up too quickly and overshoot the “right” target too soon, it’s hard to see a scenario in which growth stocks will do well during that phase. I’m not calling for this scenario to play out, but it should be on your radar as a possibility—especially if the Fed sits pat and lets it happen without any intervention.
We should get incremental clarity on 10-Year yields today. This afternoon the Treasury Department should release results of a $38 billion 10-Year Note auction.
Ultimately, a harsher decline in growth stocks would likely create even more attractive buying opportunities as it should be relatively short lived. But it would also be painful to hold current positions through it. Buying into such a decline would likely feel wrong at the time, especially if you are heavily invested going into it.
To be in a position to be more hunter than hunted, it would be wise to have some cash available. The only downside to holding cash now is if the market shoots higher you may miss out on some gains. You have to decide for yourself what the right balance of cash is right now based on your individual circumstances.
More positive thoughts ...
Software, Internet and digital transformation stocks, to which we have significant exposure, are now a lot less expensive on valuation than they were a month ago. Management teams are largely positive on their company’s prospects in 2021 and while there are some that benefited from the pandemic, there are also plenty for which a return to “normal” is a net positive. I do not think the long-term uptrend for these stocks is anywhere close to over.
A possible short-term bullish consideration is the $1.9 trillion economic stimulus bill that’s likely to pass in the House. While the recipients of checks will be narrower than with the $2.3 trillion CARES act (the checks will be larger), it’s notable that when those checks were sent out many recipients plowed cash into the stock market. That is likely to happen again to some degree and could give a boost to certain stocks.
What could they buy? Would purchases be skewed more toward growth, or value? It’s anybody’s guess, but my suspicion is that people would buy into names with products and services they are familiar with.
Here is a handy image, courtesy of Quartz, of who will benefit the most from Joe Biden’s American Rescue Plan. It will be very interesting to see how this all plays out.
That’s it for now. As mentioned earlier, tomorrow’s Weekly Update will be focused more on stocks and less on all the other stuff bouncing around in my head!