Published July 17, 2020
A few miscellaneous notes this week that describe the current market outlook, foggy though it be. Starting at the highest level with the wide range of earnings projections for the S&P 500. Currently, the S&P 500 index trades around 3200. If we look at the chart below, we see a 2021 earnings per share for the S&P 500 range of $135-170. At $135, the S&P 500 is trading at price-earnings ratio of 23, on the high end of “normal”.
At $170, the price-earnings ratio is 19 – not cheap, but easily in the typical range given how low interest rates are.
So, the U.S. stock market is not really cheap right now. But the U.S. stock market has spent much of this year focused almost entirely on a small collection of internet-driven stocks – the so-called FANGMA of Facebook, Amazon, Netflix, Google, Microsoft, and Apple. These six stocks account for half of the Nasdaq 100 (QQQ) index. They comprise about 25% of the S&P 500, an unusually high level of concentration for such a small group of stocks. The performance of this cluster of stocks relative to the broader market has been off the charts as you see below in a comparison of the Nasdaq 100 to an index of equally-weighted stocks.
In order to keep going, this market needs to spread out a bit. A couple of possibilities are emerging. Though a relatively small part of the overall market, the activity in housing is bullish. Inventories are extremely low as people are maybe skittish about showing their houses and/or cautious about their economic future. The left-side chart below shows those low home inventories (blue line) while the chart on the right tracks record low mortgage interest rates. The interest rate on a 30-year mortgage dipped below 3.0% this week.
Meanwhile, international stocks have clicked off a couple of weeks of relative outperformance over the U.S. market (see black section of line on the lower right of the chart below). Copper prices, often viewed as an indicator of global economic activity, are back at last year’s highs.
If the QQQ can take a rest while other parts of the market show some strength, stocks overall might be able to escape the downward pull of the coronavirus news, which remains a serious cloud overhead for markets.
Stocks opened the week with a +2% surge after a deal in the semiconductor space encouraged investors. However, an announcement of delayed physical school openings in California sapped the market’s enthusiasm to leave indexes down -0.9%, with the Nasdaq down twice that amount. That negative reversal looked ugly and could have led to further selling. But it didn’t. Tuesday brought a complete flip of the script with stocks overcoming early weakness to rise +1.3%. Earnings season began Tuesday with a slew of banks reporting. A foggy outlook led banks to throw billion of dollars into loan-loss reserves. But the results still generally beat estimates with notable strength from Goldman Sachs (GS), U.S. Bancorp (USB), and Morgan Stanley (MS). Wednesday delivered an extension of the rally with promising results from Moderna’s covid vaccine trials propelling stocks higher by +0.9%. Chinese stocks tumbled -4% Thursday while jobless claims came in relatively flat, a disappointment given previous downward trends. Nonetheless, losses were slim at only -0.3%. Stocks resumed their rise Friday despite a -7% drop in shares of Netflix (NFLX). Investors spent much of this week rotating out of the high-flying Nasdaq 100 (QQQ) leaders, stepping away from the shelter-at-home trade and moving into other sectors. For example, Amazon (AMZN) opened the week rising above $3300, but ended up falling all five days to close the week under $3000. Meanwhile, home-builder D.R.Horton (DHI) broke out as housing activity picks up steam.
Stocks again suffered an early week scare before buyers came in to reassert control. The S&P 500 held above the 3200 level to close the week with a +1.29% lift. The Nasdaq 100 (QQQ) slid -1.72% while the small-cap Russell 2000 (IWM) showed relatively strength with a +3.74% rise.
Warm wishes and until next week.