Big Small Cap Rally
The stock market had a solid Monday rally after selling off on Friday. Huge winners were the small caps. Specifically, the S&P 500 rose 1.47%, the Nasdaq rose 1.2%, and the Russell 2000 rose 3.08%. Tech stocks underperformed which is extremely rare for this market since the March bottom. CLOU cloud index fell 0.94% as Fastly fell 9.66%. Another big loser was Beyond Meat which fell 7.15%.
Tesla bucked the trend as it was up 5.17%, putting it 1.5% below its record high. Tesla is destroying the electric car competition, but that’s more than priced in. There needs to be an autonomous network of Teslas driving people around and earning money for this stock to be worth the current price. Since there is zero possibility of that happening in the next few years, it might be best to avoid the name.
Let’s Look At Sentiment
Favorite sentiment metrics are price and valuation. If the earnings multiple is high, it means investors are confident earnings will be strong. All the other sentiment metrics have flaws. They can rarely all be right because they conflict often. DataTrek surveyed 341 investors. Let’s see what they found.
As you can see from the image below, 41% of investors think the S&P 500 will end the year higher by 5% or more from current levels. That’s a pretty big leap for an expensive market. 2nd question was about the best asset class for the rest of the year. U.S. large cap stocks won with 38% and gold was in 2nd with 29%. Only 11% said small cap U.S. stocks. Personally, I’m more bullish on small caps than large caps.
52% think tech will do the best in the rest of the year and 12% said healthcare. Many are very bearish on cloud and biotech stocks because they have gone parabolic. Some like to avoid the hot sectors. Utilities, industrials, real estate, and materials received 6% of the vote combined. 77% said the Fed won’t go to negative rates which is obviously correct. 50% said the unemployment rate will be between 10% and 15% in December. That’s not that meaningful because it’s such a wide range.
40% think America will have the best economic growth between now and the end of the year. 29% said China. These investors are very bullish on the fiscal stimulus. Only 1% think the 10 year yield will end the year above 1.5%. That’s pretty amazing. 10 year yield is currently at 63 basis points. 62% said they have more cash than at the start of the year.
36% predicted a W shaped recovery. That’s an incredibly bearish view in my opinion, but others may think choppiness is fine. 29% think the S&P 500 will retest the lows. They are holding onto something that won’t happen even with a 2nd wave. 48% said Joe Biden will become president. We have no idea who will win. Only 35% think the Democrats will win the House and the Senate. If they don’t win both, it will be impossible to raise taxes.
Very Unusual Investor Sentiment
AAII investor sentiment survey showed a high percentage of bears. This is weird because stocks have done so well. Usually, you want to buy when investors are panicking. However, you can nix that idea because the stock market is elevated right now. You can argue that if most of these investors change their mind and go bullish, stocks will rise. Personally, I disagree, and think they are already positioned bullish, but they are scared of valuations or the economy.
The chart above details how unusual the situation is. As you can see, it graphs the 3 month change in the S&P 500. In the past 2 readings, there has never even been close to this few bulls versus bears with the stock market doing this well in the past 3 months. The stock market always climbs a wall of worry, but this rally has brought out the most skepticism ever.
Usually, investors jump on the bandwagon, but now the more stocks rally, the more bearish people get. That’s why some haven’t been fading this indicator like we usually do. If the stock market has a correction and the percentage of bulls rises, we will still buy stocks.
Higher Taxes Could Be Coming
If Joe Biden becomes president, he will try to roll back some of the Trump tax cuts. It will be tougher for him to do so if the Democrats don’t win the Senate and the House. Usually, a sitting president’s party loses seats in Congress in mid-term elections. That means if he doesn’t start with a Democratic Congress, he’s unlikely to have one in the 2nd half of his first term. We have no idea who will win; we can just prepare for the worst which would be higher taxes.
The stock market usually declines before the election when the incumbent loses. Either the decline indicates the economy is doing bad which is bad for the incumbent or it means the stock market doesn’t like change. It’s likely a combination of the 2. With Joe Biden leading in the polls, this is a bad sign for stocks. Stocks are unlikely to wait for September to start declining. Biden allegedly has a large lead, and the stock market should price in him winning now.
America Dominates The Rest Of The World
Last time the Nasdaq was higher after the first half while the Dow and the S&P 500 were both down was in 1977. That was the 2nd time since the Nasdaq was started in 1971.
A big tech rally has been carrying the Nasdaq and the U.S. stock market. As you can see from the chart below, America has outperformed the rest of the world by the most since at least 1973. This outperformance makes the 1990s tech rally look small.
