–If this market has you confused or fearful, join the club
–A look backward may help — The battle of the Covid19 ‘haves’ and ‘have nots’ plays out.
— leaping to the right conclusions is essential … my post tries to clear the fog.
This might help
The following is a reprint of a post that I published May 9, 2021. It was a preview of the market that we are experiencing today, excepting one key ingredient. It is not just the tech/ innovation trade that is getting hammered. It is everything! The ‘haves’ (the darlings of the Covid-19 trade) are justifiably under pressure. The ‘have nots’ (most everything else) should be a fertile field for new money. I continue to believe that the economy is doing fine. The media feeding frenzy over the rise in interest rates/Fed policy (off emergency low levels), the potential for a recession and the inflation bump we are seeing is what they do … leaping to the wrong conclusion.
Wrong Conclusions–The media and economists are here to help?
Friday’s jobs report miss was a doozie … estimated 1,000,000 new jobs, actual 266,000. Yes, the prediction business is tough. Yes, the economy is doing great. How could the number miss by so much from the venerable economic community’s (these guys are generally not a helpful resource in the investment process) learned guess? The initial headline from CNBC was, “Dow futures (which were up 200 points) turn negative, Nasdaq futures jump as yields dive on jobs report.” The link I’ve attached is to a corrected post talking about how well the market ended up Friday.
Could it be these minions were failing to account for a policy error in the American Rescue Plan Act of 2021 signed into law in March and the provisions having to do with extended unemployment benefits?
There is a provision in the plan the provides for $300 per week bonus payments to unemployed workers until September 6, 2021. As a result of this provision many workers are dollars ahead by not working even though businesses around the country are starving for new help. Economically this is very rational behavior on the part of workers that many economists for some reason did not factor heavily enough into their estimates. However the market’s quickly jumped-to conclusion (by the computers and some real live market participants) was that this was a sign of unforeseen economic weakness. Sell first, ask questions later … all signs of a very skittish market.
Mini-flight to safety … Returning to the Covid19 Playbook
Market reaction to this news was was bifurcated, buy safety asset– bonds, gold, Bitcoin (?) and new economy/innovation– and sell risk (all other common stocks). The yield on the 10-year US Treasury fell 9 basis points to 1.47% (Closing 5/7 at 1.58%). Gold spiked up $54 an once. Bitcoin jumped $2400 (not sure why this might be considered a safe haven by some). And true to the ‘Covid play book’ the Nasdaq composite index jumped 300 points. Ta Da … the new economy and innovation … a sector where the sun always shines and valuations are irrelevant.
Cathie Wood For the Defense
Cathie Wood is a genius investor who took a simple concept of investing in growth, especially innovation, to create a vast actively managed ETF group, ARK Funds. By charter she must invest in companies possessing these qualities of growth and innovation. She hit a seam in the market where her concept jibed with a trend in place that favored big cap high quality growth and built upon it with her innovation theme. Covid 19 came along drawing even more money away from old economy stocks into that which was new and sleek. She hit the ball out of the park. Last year her big fund, the Ark Innovation ETF (ARKK), turned in a whopping 159% return. In the stock market as in nature ‘no tree grows to the sky’. It appears to be time for ‘big tech'(Armani, style and fashion) to rest and the ‘old economy’ (Old Navy)to shine. Unfortunately, Ms. Wood is trapped in Armani. She is constantly forced to defend her style IN A MARKET THAT APPEARS TO BE MOVING IN A DIFFERENT DIRECTION as this clip from Friday shows:”Cathie Wood loves the setup for her stocks after sell-off…” Innovation Fund lost more than 9% last week. She is now promoting the that notion her Innovation fund might return 25% to 30% from its current level in 2021.
Interestingly, she has been selling Apple, one of the key beneficiaries of the Covid market. Apple has benefitted greatly from a new iPhone launch this year and product refreshes, oh yes, and tons of free money dropped on many people who continued to work. Huge demand has been drawn forward by the stimulus payments. This is now in the rear-view mirror. There are probably more companies in the Ark portfolio that are likely to face similar challenges. THIS IS NOT TO SAY THAT THE LONG -TERM INVESTOR SHOULD SELL APPLE OR ITS ILK. IT IS TO SAY THAT “BIG TECH” (A LEAP IN THE WRONG DIRECTION) MAY NOT BE WHERE THE ACTION IS IN THE MARKET AS WE GO FORWARD.
Don’t join the panic. Don’t leap to the wrong conclusion.
P.S. Context–The S&P 500 (at that time 25% of its Market cap was FAANGM stocks) closed at 4056 5/12/21. It peaked 1/4/22 at 4818 … 5/29/22 close 4132. ARKK closed at $99.84 5/12/21. The close 4/29/22 was $47.13, down almost 53%.
What’s your take?
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