Morning Jog

Flying High Again

If you spend five decades following the markets, as Bob Farrell did in his Chief Market Analyst role at Merrill Lynch, you get to know a thing or two about a thing or two. His “10 Market Rules to Remember” are a must-read for any investor and I am reminded of one of them as the S&P propels to all-time highs this week:

Markets are strongest when they are broad and weakest when they narrow to a
handful of blue-chip names.

The market’s move this year has been nothing short of remarkable. Thank you very much, Chairman Powell and Congress. But monetary and fiscal relief measures only tell one part of the story. The other pertains to the structure of our equity market, heavily weighted towards technology and healthcare sectors heading into this year, their weight only growing as the recession unfolded.

The top five companies in the S&P 500 – Apple, Microsoft, Amazon, Alphabet and Facebook – now comprise the highest share in the index (just under 24%, see here) in 40 years and have driven market performance as the other 495 names are still in the red as a group. Growth stocks are outperforming value by 40%, and while small cap stocks have started to play catch-up last month, the small cap index is still down 6% for the year. It is an obvious point that an index weighted by market cap will have the largest companies sway performance, however the extent to which the five tech giants have led the recovery is unusual from prior history.

We are in unusual times, and in an era of unlimited monetary liquidity and highly uncertain economic trajectory, investors are willing to pay up for stability and perceived resilience, largely abandoning cyclical sectors like Financials and Energy.

The disparity evident in the stock market is echoed by the divergence in the real economy as well. Peter Atwater aptly calls it the K-shaped recovery, for the widening gap between the haves and the have-nots. As the tech sector is boosting the stock market, housing and autos are lifting economic growth, while other segments of the economy, such as travel, hospitality and many small businesses continue to languish.

Those able to work remotely have adjusted just fine (a Zoom call interruption by a crying toddler, notwithstanding), while 27 million Americans are receiving some form of unemployment benefits, a majority of whom are not expecting to return to their pre-crisis jobs.

Despite markets reaching new highs and the many headlines about hordes of day-traders flooding the market, the percentage of Americans who own stock directly, or through retirement funds, is only 55%. Within that, the majority of stock market ownership is held by the top 10% income earners – a subset of investors with a much lower propensity to consume and recycle the stock market gains into the Main street economy.

The next few weeks will be critical for shaping the path of our recovery. Not due to any new market records, but the magnitude of the second relief bill, as Democrats and Republicans bridge the impasse to extend unemployment benefits and provide support to small businesses.

In the meantime, I am reminded of another one of Bob Farrell’s rules:

Exponential rapidly rising or falling markets usually go further than you think,
but they do not correct by going sideways.

Enjoy your weekend.