Investors Are Negative
Investors are a lot more negative than the S&P 500 makes it look. Dynamics under the hood of the market are all towards one direction. That is buying the stocks of the companies that do well in this new environment and selling the one that underperform. I
t’s a negative viewpoint because it’s predicated on the economy not getting back to the way it was before this recession. This was supposed to be an exogenous quick event, but investors aren’t letting go of the trades that have worked. For example, Etsy stock has rallied 146% from April 2nd.
Obviously, the big players like Netflix have done really well. Netflix stock is up 51.98% from March 16th. It now has an almost $200 billion market cap.
As you can see from the chart above, the market cap of the top 5 firms in the S&P 500 is equal to the bottom 354 firms. One example of how negative investors are is the performance of REIT Simon Property Group. The company made a poorly timed acquisition right before the recession which might not go through. However, this is still a great company. 75% of its profits from come from A rated malls. These malls will survive and thrive in the new omnichannel world of the next decade.
Stores will always exist as marketing showrooms. Everyone knows malls will exist in the long run. That’s why Amazon has stores in malls. Simon Property Group stock is down 64.63% year to date. It’s only up 16.61% from its low. It’s trading at the same price it was at in June 2009 and August 2004. It’s about half its net asset value.
A turn must be coming soon. We can’t imagine it not happening. Companies hit the hardest by this recession will do well and the tech and cloud stocks will have a correction. Valuations are distorted. Many of the speculative tech stocks have run too far. If they fall, we could see a 10% decline in the S&P 500 even with most stocks doing well. We could have the top 5 stocks fall 10% and the bottom 200 stocks rise 10% and be down.
In the recent past, someone said that calling for a retest of the lows meant Amazon and Microsoft would decline. They never did and the market never retested the low. Only the worst performing companies like SPG are near their lows. So now we're not calling for the high fliers to make new lows, but for a sharp pullback in the double digits. There’s no fundamental reason for the tech stocks to fall, but there’s no reason some are this expensive.
Consumer Sentiment Increases
Many have been calling for a stabilization of consumer sentiment for about a month now because it fell deeply and expectations weren’t that bad. Plus, the stock market has been doing well, stimulus checks are going out, there is some discounting, and there is hope about states reopening.
This thesis was mostly proven right by the May preliminary University of Michigan sentiment report. Only aspect that changed was that current conditions got better, not expectations.
Headline index was up from 71.8 to 73.7. Expectations index was down from 70.1 to 67.7 which is a new recession low. The chart above shows the 7 day moving average of expectations. It seems to keep bottoming in the low 60s and then rising. It’s tough to say if it will be lower in the final May reading. But it can’t get much lower than where it is now. Consumers must be worried about the 2nd wave of COVID-19.
On the other hand, the current conditions index actually spiked. It rose from 74.3 to 83 which is a nice increase considering most states are only partially reopened or shutdown completely. An increase from terrible to bad is the promised land for investors.
It’s surprising anyone was positive given the bad news in the media. The chart below shows the number of unfavorable news mentions on business conditions reached the highest level ever. To be fair, this economy is worse than the 2008 financial crisis.
Personal financial prospects were the worst in almost 6 years with the worst results coming from the upper class which is terrible news for spending. It’s not surprising the lower class did better since they are getting more stimulus money and are getting paid more to stay home than to work. It’s not a bad situation for many in the working poor.
Buying conditions improved because of sales, low rates, and the stimulus checks. Consumers’ inflation estimates spiked possibly because of all the government spending and borrowing. 1 year inflation estimate spiked to 3% which was the biggest monthly jump since November 1979. 5 year inflation estimates rose to 2.6% which is tied for the highest level in almost 4 years.
Spending Is Falling Less
A decline in SPG stock is surprising given the improving trends the consumer is showing. As you can see from the chart below, in states that have opened their economies up a bit (Texas and Georgia) there has been a lower decline in spending at restaurants.
We’re talking about declines of more than 60% going to less than 20%. These latest results look like a normal recession. I wonder if we see positive growth at any point in the next few weeks. There is a lot of pent up demand.
Conclusion
Tech stocks rule the market. They have done well while the rest of the market hasn’t. Investors are scared of the economy which is why they are buying online retailers at crazy multiples and selling brick and mortar stores for pennies on the dollar. Long SPG and short SHOP would be quite the trade over the next year.
Consumer sentiment improved because of current conditions. Daily spending growth rate in Georgia and Texas started to improve in April. Georgia was the hardest hit state. If Georgia can recover, the rest of the country can too.