S&P Has Volatile Week Driven by Headlines, Bullish Thesis Remains as Intact as Ever
Summary
– S&P 500 closes at 4,166.45 down from 4,274.44. Losses concentrated in reflationary names.
– Quadruple witching expiration and FOMC meeting created volatility and uncertainty.
– We explain how we want you to use our research. Read the river like Mark Twain does.
– Despite the headwinds, hyperbole, and drama this week we remain FIRMLY bullish on stocks. Energy remains our favorite sector. We upgraded FAANG last week.
“The Sun means that we are going to have wind tomorrow; that floating log means that the river is rising, small thanks to it; that slanting mark on the water refers to a bluff reef which is going to kill somebody’s’ steamboat one of these nights, if it keeps on stretching out like that; those tumbling ‘boils’ show a dissolving bar and a changing channel there; the lines and circles in slick water over yonder are a warning that troublesome place is shoaling up dangerously.” -Mark Twain, Two Ways of Looking at a River
The S&P 500 closed about 1.3% on the day Friday at 4,166.45 down from 4,247.44. It was a hectic week by many measures and the market had to face some high-risk headwinds. The re-opening trade and Epicenter sectors were hit hard as the market worked to process the movement of rates, a process certainly not made easier by the usually spooky activity in derivatives markets leading to expirations.
Sometimes you get a noisy counter-trend week in a bull-market and that’s exactly what we think this week was. As my colleague Tom Lee pointed out earlier, markets were likely to stumble this week in the face of significant headwinds. Another in a string of consistently accurate calls. While some may suspect Voodoo or Santeria, Tom’s method is really in listening to the market with a seasoned ear and watching its participants with a seasoned eye.
Wow, he must be able to read the future right? Well, while some equity analysis might want you to think they read the future, we are trying to help you out so we do not want you to think we can. Why? Because we can’t! What we’re doing is much more like what one of America’s great authors did to keep his passengers safe while traveling up and down the Mississippi. Sure, there are certainly complicated models, correlations and boat loads of data to examine, but in the end Tom’s excellent call last week on Financials and FAANG is through diligent deductive reasoning and crack-veteran status.
As one of the great American authors, Mark Twain, describes above the seasoned eye of a riverboat captain as he sees things coming along the river that the average bystander would miss. Being head of equities at the largest and most influential bank in the United States is quite a large steamship to pilot and thus when Tom looks at the river (metaphor for the market if you’re confused) he sees things that are informed by navigating it for years, by observing things that untrained eyes will not even comprehend. That’s why Tom let you know what was coming around the next fork in the bend, the spooky dog days of a quadruple witching Friday!
A little tip as well. When people pat themselves on the back and act supremely confident then you should really be skeptical. You’ll never hear Tom say he’s certain of anything, but you may hear loud detractors on Twitter or elsewhere mad and shouting at the market. Ulysses S. Grant, whose auto-biography Twain penned, once said “the most confident critics are generally those who know the least about the matter criticized.”
If you notice we try to stick to fact-driven conclusions, data-driven theses, and perhaps most importantly we have humility and course correct when we misinterpreted what the market, or the river for our article’s purposes, had suggested to us. No harm, no foul when it happens because like we said; we aren’t in the business of predicting the future. Furthermore, this approach to business doesn’t strike us as sustainable as we are all human and behind a veil of ignorance with regards what comes next, in the context of the market or any other unpredictable future event.
Despite the reflation trade getting hammered and what may have looked like concerns about future growth, we think the outcome of the weeks’ events is decidedly bullish. We do think that the turmoil associated with the quadruple witching event may continue into next week but that, when the dust has settled markets will be in a very good position to materially rally.
The reaction in yields is incredibly bullish for stocks on a fundamental level because as yields go down the relative returns available in the equity asset class become more attractive to investors.
In the end, regardless of what happened this week in headlines, we think the economy is actually stronger in many ways than before the pandemic. What? Look at individual wealth, the ratio of jobs available to individuals, asset prices, and credit score. New business formation and venture capital funding are at ATHs and the burgeoning American entrepreneurial spirit seems slated to come back with a vengeance.
The stock market is strong and despite some weird logic out there this makes total sense. In the face of an incredible exogenous crisis like COVID-19 why wouldn’t publicly traded companies have held up better than smaller, less capitalized private ones? If you have a bag of umbrellas, one certified with no holes and one you’re not sure of, what happens to the value of the certified bag when it starts raining? The bull market in stocks is just getting started! We have a long way down-river until the currents go out of favor for the equity asset class.
