Market Marked By Indices Holding Up, Bloodbath at Sector Level

Summary

– S&P 500 closed at 4,395.26 slightly down from an ATH of 4,411.79 last week

– The market-action Friday marked a recent reversal, with re-opening and reflation plays declining and sectors like Real Estate and Staples eking out minor gains

– Despite the rising cases of Delta Variant, the economy is continuing to show strength and the VIX has not spiked in a major way since the sell off on July 19^th

– The violent activity within sectors and various names have likely de-risked many portfolios. The path of Delta seems to us to be near a peak. If this is true, we expect a major risk rally
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The market has been sideways and seems to be lacking direction. Like being stuck in windless doldrums, the summer months often trade sideways for several reasons. Also, despite the fact that the indices are hovering quite close to their all-time highs, a story of brutal and sudden sectoral rotation has been playing out. Many of our clients certainly don’t feel like we’re at all-time-highs and the frightening headlines and uncertainty about the effects of vaccine certainly appear to be spreading the potent contagion of fear.

Some people seem to be definitely ceding to it is all happening again, narrative. Only thing is, we’re looking at the data and it’s not going to play out the same as last time. Vaccinations, while not achieving their initial goal, do appear particularly effective on mitigating your risk at the individual level. In addition, Pfizer has recently released data on a booster shot which very significantly bolsters the antibody response. We think this fear may provide an opportunity. As Jay Powell pointed out in his press conference this week (and my colleague Tom Lee made a similar point using VIX spikes as a reference) each successive wave of the virus has taken less and less of a toll on the economy. As we do, human beings are adapting to the bleak COVID hand we’ve been dealt.

While the indexes have held up, many of our favored sectors have languished as the prevalence of a nee variant menaced the United States. Unfortunately, the goal of achieving herd immunity through a mass-vaccination campaign seems all but lost as vaccine hesitance continues in large numbers. At the private and public level, many major entities have begun mandating vaccines. We will of course continue monitoring this trend. We certainly are proponents of individuals limiting their individual externalities with the vaccine. We see very clearly in the data that it works. Nonetheless, vaccinated people may not be aware they are spreading the virus, so please be conscious and act how you would want your neighbor to. If you feel sick at all, we’d suggest erring on the side of caution. We also would suggest loading up on Vitamin D. Seriously! Please!

The US economy grew at a yearly pace of 6.5% in the second quarter which was below the anticipated reading of 8.4%. However, as so many economic readings are, it is important to take a deep dive below the headline. We are data driven and the complex and nuanced conclusions we uncover from spending more time in the data than almost anyone else is willing to do not lend themselves easily to catch-phrases and headlines; thus we’d avoid seeing this miss in a binary light.

The US consumer continues to show extraordinary strength and adjacent readings suggest that this financial strength will be a lot more endurable than the cynics who think it is solely due to government transfers. US consumer spending advances at 11.8% which has only been exceeded once since tracking began in 1952, and this was during the Q32020. So, that little nuance in the economic numbers actually suggests growth may be continuing to accelerate, rather than being arrested in its tracks by a virus that will almost surely become endemic.

Again, if you get a simple explanation that is so neat it gets you giddy, it is probably not correct. We live in a complicated world that takes great time and effort to understand. We also live in a world whose discourse has been dramatically altered by the digital age and the advertising incentives that drive the profits of some of its most successful companies. Please always remember that hyperbole and tidy, neat explanations are rarely useful in outfoxing the consensus of the investing the world.

It appears that supply-chain disruptions were likely the culprit for the economic numbers coming in short. Business investment is picking up majorly and was responsible for well over a tenth of the total growth over the quarter. We believe a torrent of CAPEX will be unleashed. Earnings have been incredibly strong, and we expect them to remain so. The rise of Delta likely caused many companies to pull positive guidance, which has likely contributed to the overall fear in the air.

We highlighted a stock in our Signal From Noise column this week and explored the concept of the Keynesian Beauty Contest in how to think about valuation. Remember folks, while fundamentals and relative valuation will always be important, picking out a stock that the investing public has yet to recognize the value in is where those returns can get really get up there. Think of TSLA 0.63%  a year ago; there was a chorus of TSLA bears saying that there simply no way that the company’s valuation was attached to fundamentals and that actual growth achieved by the company would result in an epic crash. Well, in their recent earnings they had a 10x increase in net income YoY. This isn’t just from easy comps. We point out that AMZN was long considered homely by the street. Despite, it’s first revenue miss in three years resulting in some nasty price action, we’d still say the stock has proven itself “Prom Queen” material.

Look, we know there’s a lot to be concerned about right now. We pay very close attention to those main concerns, and we do see some silver lining. The US consumer is the most powerful economic engine in the world. With the consumer as strong as they are and businesses as lean as they are, it is going to take a lot to derail a recovery fueled by pent-up demand, flush personal balance sheets and an accelerated digital transformation that is unlocking value in all sorts of unexpected corners of the economy. The saying that says markets climb a wall of worry and fall on a slope of hope was made for times like these. I’d listen to what my colleague Tom Lee is saying about August before giving into to the many fears and risks that are floating around; we think it may be a better month for returns than normal.