CWS Market Review – September 4, 2020

“Become more humble as the market goes your way.” – Bernard Baruch

After a spectacular run, the stock market suddenly got a case of the jitters on Thursday. Up until that point, the market had been enjoying an explosive rally.

The numbers are truly impressive. Last month was the best August for the S&P 500 in 36 years. Before Thursday’s swan dive, the index had rallied nine times in the previous 10 days. Going out further, the index closed higher 19 times in 25 days.

It seemed like the market was rising every day, and every day it was being led by the same big-name companies. Heck, Tesla closed higher not for anything they did but simply because they split their stock! (Elon, if you’re reading this, take note of this week’s epigraph.)

I suppose the bulls thought they had scared away the last bear. Not so! On Thursday, the S&P 500 got dinged for a 3.5% loss. That was more than four times worse than any other day in the last six weeks (which probably says more about the last six weeks than it does about Thursday).

Confused? Don’t worry. In this week’s issue, I’ll break down for you what’s happening. I’ll also highlight some recent economic news, which hasn’t been not terrible. I’ll explain what I mean. First, let’s look at Thursday’s Big Chill.

The Rally Finally Gets Some Pushback

One of the old chestnuts on Wall Street is that trends can last longer than you think. It’s natural for a market-watcher to think that some trend has finally exhausted itself, yet it still goes on. Thinking you can accurately spot the turning point is a dangerous game.

I’ve been thinking about this lately since Wall Street has fallen under the spell of a few select stocks. Earlier I mentioned Tesla. On Monday, the stock jumped more than 12% when the company split its stock 5-for-1. To be clear, nothing happened. A stock split has zero bearing on the underlying share price.

But Tesla doesn’t have shareholders, it has fan boys. TSLA is up more than 780% over the last 12 months. Here’s my favorite Tesla fact: the average share of Tesla is owned for ten days.

But even Tesla got caught up in the selling. From Tuesday’s high to Thursday’s low, shares of Tesla dropped 20%.

Check out the intra-day chart of the Nasdaq:

Zoom is another superstar stock that had a dramatic week this week. I would have to say that Zoom has probably been the stock that’s most emblematic of 2020. It’s reached the level of Xerox and Kleenex—the brand name is also the generic name.

On Tuesday, Zoom zoomed higher by more than 40%. The company reported earnings that demolished Wall Street’s estimates. For the most recent quarter, Zoom earned 92 cents per share. That more than doubled Wall Street’s consensus of 45 cents per share. This year, the stock is up 460%.

One interesting side note about Zoom. The company’s founder had his visa application rejected by the U.S. government eight times. On Tuesday, he made $6.6 billion.

But like Tesla, Zoom got tangled up in the selling. From Tuesday’s high to Thursday’s close, Zoom lost 22%, a drop similar to Tesla’s.

Apple Is Now Worth More than the Russell 2000

Shares of Apple also got a nice bump this week after they, too, did a stock split. At one point, Apple’s market value surpassed the market value of the Russell 2000. One company is worth more than an index of 2,000 stocks.

And like the others, Apple got a super-atomic wedgie on Thursday. The company lost a staggering $180 billion in market value.

In previous issues I’ve written about how the Big Five (Apple, Amazon, Facebook, Google and Microsoft) have nearly taken over the entire market. The companies are so big, and they’ve done so well, that they distort the rest of the market. These five companies now account for more than 20% of the S&P 500.

So much of the relative performance this year boils down to the question: do you have exposure to the Big Five (or Zoom or Tesla) or not? Our Buy List does not. Despite this, I’ve been impressed by the way we’ve held our own. For example, our Buy List is running ahead of the S&P 500 Equal Weight Index. That’s the regular S&P 500, but with every stock counting the same.

I have to explain that while our Buy List did reach new highs last week and this week, it generally lagged the market. That’s due to the nature of our stocks. Most of the stocks on our Buy List are stable companies and very high-quality. As such, they don’t quite ride the same updraft during a ferocious bull market such as we’ve had. Though to be clear, we’ve gone higher.

Conversely, when the market broke on Thursday, we also fell, but not as much as the overall market. Yesterday, 16 of our 25 stocks fell less than the overall market. Two stocks, Eagle Bancorp (EGBN) and AFLAC (AFL), actually closed higher.

Thursday was a good example of what market folks call a “contra-trend” day. That’s a fancy word meaning all the stuff that’s been doing great is having a rotten day. Meanwhile, all the stuff that’s been lagging is doing well.

Contra-trend rallies are typical within larger rallies, but we can’t say that this spells the end of the superstar stock rally. Clearly, there are nervous investors out there, and the bears have shown that they’re willing to push back.

There are parts of this market that have been almost entirely left behind by this rally. Value stocks, for example, haven’t done much. Here’s a chart of S&P 500 Value (blue) and S&P 500 Growth (black). Growth has outperformed Value, but the gap got dramatically wider this year.

If you look closely, at the end of the chart, Thursday’s drop is visible for Growth, but Value was impacted much more.

Also, the non-tech stocks in the S&P 500 haven’t done particularly well. There’s a decent chance that Thursday could mark the beginning of rotation away from the big Growth winners and toward the Value laggers.

As a very general rule of thumb, the Buy List keeps up with the overall market during bull markets. But during bear markets has been where we’ve set ourselves apart. That happened again earlier this year when the S&P 500 lost more than one-third of its value in just over a month.

The U.S. Economy Is Slowly Getting Better

I also wanted to touch on a few of the recent economic reports. There’s been some brighter economic news, but I have to put that in the context of a very distressing economy for so many. The economy is getting better, but we have a long way to go until we get back to normal.

Last week, the government revised Q2 GDP from an annualized decline of 32.9% to one of “just” 31.7%. In late October, we’ll get our first look at Q3 GDP.

The big August jobs report is due out later this morning. On Thursday, the ADP payroll report said that 428,000 private jobs were created last month. That was well short of Wall Street’s guess of 1.1 million. I should add that the ADP is not a good predictor of what the government’s report will say.

The most recent jobless-claims report came in at 881,000. That’s much better than Wall Street’s estimate of 950,000. This is the lowest initial-claims report since the lockdowns started nearly six months ago.

The Labor Department also changed its methodology which may have overstated the jobless claims earlier this year. Continuing claims fell to 13.254 million.

Factory orders for July rose by 6.4%. Perhaps the best news was the ISM Manufacturing Index. This week’s report came in at 56, which is its best reading in nearly two years. We also learned this week that home prices are rising at the fastest rate in nearly two years. That could be helping business for our friends at Trex (TREX).

That’s all for now. The stock market will be closed on Monday for Labor Day. There’s not much in the way of economic news next week, but there are a few items I want to highlight. On Tuesday, the consumer-credit report comes out. On Wednesday, we’ll get another report on job openings. Thursday we’ll get another jobless-claims report. Then on Friday, the latest CPI report is released. 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 September 4th, 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.