Tuesday Rollercoaster
The stock market exhibited high volatility on Tuesday afternoon. Let’s set the scene. Stock market was rallying nicely, with strong outperformance by the reopening stocks and banks. There was a burgeoning reflation trade as the TLT (long bond ETF) was falling. TLT almost closed below its 200 day moving average for the first time since March 1st, 2019.
This has been the longest streak above that indicator in the history of this ETF (started in 2002). There certainly was more action in the stock market than the bond market in terms of pricing in more inflation; it was as if it took a day for equity investors to realize yields shot upon Monday.
Then, President Trump tweeted that the GOP should focus on the Supreme Court nominee and ignore the prospect of passing a stimulus until the election is over and he wins. He then tweeted after the close that he agrees with Powell that a stimulus is needed.
Some were confused by that, but he always supported a stimulus. He just doesn’t agree with what the Dems are offering. It’s also possible that he is playing a game of chicken with the Dems in which he hopes to eventually get a stimulus done this month.
The President’s tweets certainly surprised investors because the stock market crashed on the news. Last week he tweeted that he wanted a stimulus. Both sides seemed to be working in earnest to get something done. S&P 500 fell 2% from before the tweet to the close.
Russell 2000 had the worst reversal as it fell 2.5% from the peak to the close. A most interesting aspect of the action was that the banks outperformed tech. It seems like the market knows a stimulus is coming anyway or it sees better news on the possibility for a treatment/virus being released within the next few weeks.
Relative Performance Was Confusing
You’d think the cyclical stocks and banks would have cratered the most on the lack of a stimulus, but the banks did well, while large cap tech sold off. S&P 500 fell 1.4%, the Nasdaq fell 1.6%, and the Russell 2000 fell 0.3%. Small cap index fell the most from its peak because it was up so much. As you can see, it still outperformed.
Apple fell 2.9% and Amazon fell 3.1%. Draftkings fell 6.2% which means it’s down 11% in just 2 days. On the other hand, the regional bank index only fell 18 basis points.
Even though the tech sector fell 1.6%, the cloud index only fell 41 basis points. This selloff was more concentrated in large caps. Small cap value index fell 39 basis points, while the Nasdaq 100 fell 1.8%. It certainly wasn’t a disaster for large cap tech stocks.
It was just weird to see underperformance given the news at hand. And it seems like the market wanted to sell off on the news even though it eventually sees a stimulus passing by the end of the year. Long bond recovered some of its losses from Monday as the 10 year yield fell from 78.8 to 74.3 basis points.
House Democrats Go After Monopolies
House Democrats released a 450 page report that showed, Amazon, Apple, Facebook, and Google are all monopolies. It could have told you that in a 1 page report but the Dems needed to cover all their bases. GOP actually agrees in part with the assessment. It just doesn’t want to break these companies up like some on the left do. It’s possible that more regulations entrench these monopolies like what has happened with tobacco.
It appears the government doesn’t want new tobacco companies coming up because that could cause more people to smoke. On the other hand, it probably would be happy to see another social network gain scale. Remember, Intel used to be a monopoly the government went against.
That's not saying government regulations caused it to underperform, just that monopolies in tech are easier to break than that of tobacco. Mostly because people are entrenched in their cigarette brand of choice more than their smartphone. To be clear, people love their iPhones and Samsung devices. But we might not always connect to the internet with smartphones.
On the other hand, people have been smoking cigarettes for over 100 years. The biggest change is vaping. Vaping is much closer to smoking cigarettes than using a smartphone is to interacting with AR.
Rebalancing Coming
Remember when people were predicting Tesla to be added to the S&P 500? That’s not happening as the Fortive spin-off Vontier joined the index and Tesla was snuffed. Tesla is not going to be added until it can make profits without tax credits. Some are predicting the company will earn fewer tax credits in the next report. The firm is projected to release earnings in about 3 weeks. Good news for profitability is Model S/X sales had a higher weighting than expected.
As you can see from the chart above, there will be big changes the next time the S&P 500 rebalances. Indexes add fuel to trends by buying the stocks that have gone up and selling the ones that have gone down. Real estate and the financials will be losing stocks in the S&P 500. That might be an opportunity to buy some unloved energy companies.
To be clear, they will probably be added to the mid-cap or small cap indexes. However, those indexes get less investor interest. Many investors only buy large caps because they are seen as safer. For example, Wealthfront, the robo advisor, doesn’t buy small or mid cap stocks for its clients.
Conclusion
Tuesday was fun if you’re a trader. For once the selloff wasn’t bad for bank investors even though yields fell moderately. Large cap tech stocks fell the most, but many cloud stocks were spared. We still haven’t had a true selloff in the worst companies. Nikola is still worth $8.9 billion even though it has no technology or sales.