Steady Stock Market Leadership Despite Spreading Virus
The headlines have been dominated by the worldwide spread of the coronavirus from China and certainly markets remain uneasy about it, even though the Standard & Poor’s 500 index (SPX) surprisingly continues to hit highs. Why is that? For one thing, the U.S. equity market is viewed as a safe haven, at least as far as global equities are concerned.
For example, some anxiety can be seen in one of the two markets I tend to rely on: the so-called “fear index” VIX and the high-yield corporate bond market. I view these markets as important to confirming overall asset market trends. The VIX has largely returned to normalized levels – sub-15. This is less the case for high-yield, but I am basically attributing this to the fact that bond market is beginning to price in future rate cuts later this year.
With the seismic economic ripples expected and already seen from the outbreak, it would be natural to think that stock market leadership should have changed since the beginning of the year. If you thought that, you’d be wrong.
The shares that powered the strong pre-corona initial gains (12/31/19 to 1/17/20) are largely the same ones behind the recent SPX surge to new highs. Despite the risk, this market is still driven by technology and healthcare stocks. For example, since the end of January, 101 of the 158 points gained are derived from tech, healthcare and Amazon (AMZN). These were also the leaders at the beginning of 2020, with these groups accounting for 72 of the 100 points (12/31/19-1/17/20).
Some 23 GICS Level 4 industries (of 129) have emerged as leaders this year. These staged strong relative performance during the 4% sell-off and have outperformed strongly since 1/31/20. Among the biggest standouts are: systems software (+770 bps), homebuilding (+750), healthcare distributors (+1,480), semi-equipment makers (+930), trucking (+730, wow) and Internet retail (Amazon, +1,019). See table nearby.
Note that in particular six groups outperformed in 3 distinct periods: (i) 12/31 to 1/17; (ii) 4% downturn (1/17-1/31) and (iii) since (1/17 to now). These are the “extreme leaders”—systems software; homebuilders; application software; home improvement retail; construction and engineering, and data processing.
On the flip side, most losing groups are still losing, but some could reverse post-corona containment. Some 42 groups have been drags on overall returns. Most are deeply cyclical (steel, energy, fertilizers, etc.) and several virus-specific supply-chain disrupted such as cruise lines, home furnishings, hotels, air freight, etc. We highlighted 10 stocks that could be good bets for a “corona reversal.” (See table below.)
Many investors must be wondering why the SPX has managed to make new highs, despite the obvious and growing risks to global gross domestic product growth? As I noted above, I believe the surge in the SPX is due, in part, to the fact US equities are the safety trade “trifecta.” They offer better relative GDP growth; plus growthier stocks; and liquid large caps, while the rest of the world median stock is effectively a midcap. Moreover, the SPX value is “only” $25 trillion versus a world with $300 trillion of global household liquid assets.
What could go wrong? The greatest risk at the moment is a seismic economic ripple from the virus, which is dependent on an acceleration of infections. Offsetting this, however, is fiscal stimulus, and likely, China, Japan, US and Europe could offer some type of fiscal stimulus.
Bottom line: Stocks have been surprisingly resilient, despite what seems to be economic concerns expressed by the bond market. The following 28 stocks are among the 23 leading industries; also ranked DQM1 quantamental model: MCK, CAH, HSIC, DHI, LEN, PHM, AAPL, MSFT, GOOGL, MA, INTC, ORCL, NVDA, PYPL, QCOM, ADP, ATVI, ADSK, XLNX, MXIM, CTXS, NLOK, AMT, CCI, PGR, SBAC, IRM and J.
Figure: Comparative matrix of risk/reward drivers in 2020
Per FS Insight
Figure: FS Insight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019
