Market Slightly Up For The Week, Gains Supported By Strength in Large-Cap Tech
Key Takeaways
- The S&P 500 closed at 4,697.96 which was up from last week’s close of 4,682.86.
- Big tech stocks such as Apple and Nvidia have been holding the indexes as high levels despite some weakness in more beta-sensitive parts of the market.
- Earnings have come in very good this season and continue to show underlying strength in the economy. Q3 Net Profit margins were 12.9% vs. 10.5% in Q4 of 2019.
- The Russell 2000 has shown strength recently and hit an ATH this month. Analysts are anticipating steeper earnings growth from the Russell than from the S&P 500 in coming quarters.
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We’re so pleased to have such an engaged subscriber base. If you still don’t think the lines between crypto and equities are blurring after Michael Saylor’s talk, then we have a special crypto Signal From Noise next week to help further bolster the point. Be sure to check it out!
This was a mixed week in many ways and the tenor from Washington DC was not incredibly positive for markets. If you think high energy prices are due to anti-consumer practices, then you must also think politicians never play to the cheap seats!
We’ve been commenting on the secular setup for an Energy bull market due largely to supply issues which won’t be fixed by anything except for capital investment in upstream. Our Head of Technical Strategy sees current weakness as an opportunity and expects the sector to bottom next week.
Inflation appears to be broadening beyond the limited set of primary drivers of gasoline, cars and transportation to more sensitive components of the consumer wallet like meat and poultry which were up 12% YoY. Tobacco was up 8% and electricity was up 6%.
Housing was up 3.5%. Many pundits have cautioned to watch whether shelter and housing become a primary driver of inflation. Building permits, a leading indicator, suggested that there is still strength on the demand-side. National home prices have exceeded pre-pandemic levels by nearly 25% but the nature of the demand is very different than the runup to the Global Financial Crisis. Loan-to-value ratios are at their lowest levels since data has been kept for 35 years which supports incredible strength of the
Strength in the US dollar continued and weakness continued on the fixed income side of the asset pool. The BofA fund manager survey showed that respondents had increased their allocation to US equities to a 29% overweight, which is the most risk-on reading for equities since 2013. On the flip side, as a percent of AUM, client holdings of bonds reached 17%, which is the lowest reading ever and is well below the 15-year average of 26%.
The institutional crowd is showing more bullishness going into the end of the year. Despite this, we are not suggesting that there are a dearth of risks, but we are suggesting markets are primely positioned to climb a wall of worry into the end of the year which will be helped along by seasonal factors.
We are likely entering a period where stock-picking will take on greater significance. We have just emerged from an unprecedented situation and the worst body-blow to the economy that was suffered since the Great Depression. In some ways, it could be considered even worse. We have never undergone a coordinated global shutdown of economies and it has tested the economic infrastructure and just-in-time supply chains that evolved in a world that was dedicated to eradicating barriers to trade.
One area of strength has been retail. Dillards reported third-quarter gross margins in retail of 46.7% compared to 36.6% in the prior year. The company said gross margin improvement was due to better inventory management converging with exceptionally strong consumer demand. Macy’s has been a five or six bagger since the dog days of early COVID-19. This is showing strength in unexpected places and showing that the post-COVID rules of the road are very different than the ones that were in place before.
When you look at the data instead of the chorus of talking heads, you will be able to orient yourself better. It’s decidedly cool to be bearish and to make historical comparisons to the 1970s when the reality is more complex, more nuanced and probably much more different than the past than many folks are willing to admit. COVID-19 is resurgent and the fourth wave is developing in line with our base case. Allow our Head of Research, Tom Lee, to expand on some of the week’s developments and give you a data-driven lens to view our tumultuous through.
