CWS Market Review – July 10, 2020

“The key to making money in stocks is not to get scared out of them.” – Peter Lynch

Apparently, technology stocks didn’t get the memo that this is supposed to be a “dangerous” and “pricey” market. Since the S&P 500 reached its near-term peak on June 8, the S&P 500 has pulled back about 2.5%, but the S&P 500 tech sector has marched ahead another 6.3%.

That’s quite a large gap for such a short amount of time, especially since tech is by far the largest sector in the index. It looks like the tech sector is leaving everyone else behind, and that’s a gain on top of a very nice run since late March. Since the market bottomed out four months ago, the tech sector has gained 53%.

If you feel like you’ve seen this movie before, you’re not alone. This is somewhat similar to what happened 20 years ago when the Dot-Com Bubble and Bust turned Wall Street upside-down. The difference was that that case was, to use a technical term, totally bananas. This time, it’s merely worthy of attention.

In this week’s issue, I want to discuss the dangers of a divided market, because that’s exactly what we’re seeing. On Wall Street, a rising tide does not lift all boats. I’ll break down what it means for us.

I also have some Buy List updates for you. Several of our stocks have been hitting new highs like Ansys (ANSS), Church & Dwight (CHD), Danaher (DHR), Moody’s (MCO) and Trex (TREX). We’ve also had hot stocks like FactSet (FDS), which is up more than 20% in the last month, and Check Point Software (CHKP), which has closed higher for the last eight days in a row. But first, let’s dig deeper into this growing divide on Wall Street.

The Divided Market

When someone asks how the market is doing, it’s actually a more difficult question than it appears. The reason is that the market is the average of hundreds or even thousands of stocks, depending on the index.

My preferred index, the S&P 500, is the combined market value of 500 different companies. Due to different class shares, the index is technically composed of 505 different stocks. Lots of stocks can be doing lousy while the overall market is just fine. Or some stocks can rally while the overall market is in the dumps.

Lately, we’ve seen another phenomenon. The technology sector is rallying strongly while the rest of the market is puttering along. This isn’t noteworthy except in its degree. Even within technology stocks, the gains have been heavily skewed toward the big five tech giants.

Just this year, Apple is up 30%. Microsoft is up 35%. Google is up just 13%. Facebook is up 19%, and Amazon is the winner with a YTD gain of 72%. Bear in mind that we’re talking about big moves in companies already worth more than $1 trillion. Combined, these five companies are worth nearly $6.5 trillion. In other words, 1% of the stocks in the index comprise close to one-quarter of its entire value.

While these stocks had certainly done well before the coronavirus, they’ve become even more dominant since the economy closed up. The difference this time is that these tech giants are seen as safe assets. In normal markets, when investors flee to safety, that means stocks like utilities or blue chips. Now, many of the old safe sectors are doing the worst.

Here’s another example. The Nasdaq Composite is heavily skewed towards tech stocks. The index recently completed a 30-day run where it closed higher 25 times. On Thursday, the Nasdaq notched its 26th record close of the year. Here’s a remarkable chart. This is the S&P 500 technology sector divided by the S&P 500.

As a result, the entire S&P 500 is being impacted by only a few stocks. If you don’t own any of them, it’s like you’re playing a different game. On Wednesday, the S&P 500 was up over 0.75%. That’s a good day, but less than 300 members in the index closed higher.

More and more of the heavy lifting is falling on the shoulders of fewer stocks. Apple, Amazon and Microsoft accounted for half of Wednesday’s move.

Here’s another chart. This is of two ETFs. The blue line is the tech sector, and the red line is everything in the S&P 500 except the tech sector.

There are some similarities between today and the tech bubble of 20 years ago. Of course, that bubble was driven by the emergence of the Internet, which was a new and exciting technology. (Remember Pets-Dot-Com?) The difference this time is that it’s almost entirely being driven by a small group of companies. There are no crazy IPOs with explosive one-day gains. Also, there’s no great new technology this time. Most of the buying seems to be FOMO, fear of missing out.

The Big Five have become the mask and social distancing of investing. Everyone’s focusing on them for safety. But there’s an important question: how much will consumer behavior change in a post-Covid world? I’m inclined to think it won’t be much.

Sure, Amazon has done well since the economy has been in lockdown, but many other companies are also doing well. I expect to see many high-quality companies get back on track as the economy reopens. Disney certainly hasn’t gone away. The coronavirus has temporarily altered consumer behavior, but it hasn’t permanently changed it.

I won’t predict the bursting of a bubble, but I am leery of those stocks. While our Buy List doesn’t hold any of the Big Five, we’re not being completely shut out of the tech stocks. Ansys, Fiserv and Broadridge are all in the S&P 500 tech sector.

Our Buy List has done much better than the S&P 500 Equal Weighted Index. That includes the same stocks as the S&P 500, but with all the companies weighted equally. What this means is that we’re doing better than most stocks, even though we’re running very close to the market-cap weighted index.

I’m not trying to make excuses. We’re doing fine, but it’s important to understand the context of the current market. This trend of the Big Five can easily unwind at any moment.

The important lesson here is to not be scared by a divided market. Our stocks are still very good businesses. We’ll soon get more proof of that when earnings season starts. You should also be wary of chasing after big gains. Good investing is disciplined investing. Now let’s look at some recent news impacting our stocks.

Buy List Updates

Here are some updates on our Buy List stocks.

Shares of AFLAC (AFL) have been sluggish lately. Don’t worry. The duck stock is due to report earnings on July 28. This week, I’m dropping my Buy Below on AFLAC to $37 per share. I’m expecting good news.

Danaher (DHR) has been looking very good lately. On Thursday, DHR touched a new all-time high of $187.19 per share. Earnings will probably come out in early August. Don’t chase this one. Danaher is like the Harris Tweed jacket of investments. It belongs in every gentleman’s portfolio.

FactSet (FDS) continues to behave well for us over the last month. The stock reacted much better to its recent earnings report than I expected. For its fiscal Q3, FDS earned $2.86 per share. That beat the Street by 43 cents per share. The shares have rallied more than 20% in the last month.

Disney (DIS)’s streaming service, Disney+, got a big boost this weekend thanks to Hamilton. From Friday through Sunday, the mobile app was downloaded 513,323 times globally and 266,084 times in the United States. “Raise a glass to freedom!”

Becton, Dickinson (BDX) had some good news. The FDA gave emergency approval for its rapid antigen test for COVID-19. The shares recently broke above $258. Earnings are due out on August 6.

Check Point Software (CHKP) has been on a very nice run. The shares have closed higher for eight straight days. In its last earnings report, Check Point said it’s seen a “dramatic rise” in the number of cyber-attacks related to the coronavirus. The company will report earnings on July 22. Wall Street expects $1.43 per share. The stock has floated above our Buy Below recently, but I want to hold off on raising the latter until I can see the earnings report. If you don’t own it, hold off for now.

That’s all for now. We’ll get some key economic reports next week. On Monday, the report on the federal budget is due out. Then on Tuesday, the CPI report comes out. Consumer prices have fallen for the last three months. Wednesday is industrial production. The last three reports have been terrible. Then on Thursday, we’ll get another jobless-claims report and another report on retail sales. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by on July 10th, 2020 at 7:08 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.