Weekly Update

The Old Guard Flexes Some Muscle

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Published October 23, 2020


With the Nasdaq 100 (QQQ) index as the focus of our models, we spend a lot of time talking about that index and its major components – e.g. Amazon, Apple, Microsoft, et al. Another trend in the market, and one that might be poised to outperform the Nasdaq, is the old line industrials. Initially, this group was the beneficiary of a modest economic recovery from the depths of the pandemic shutdown. However, a recent accelerant has been hopes for a broad infrastructure package from Congress. The stock market believes this package would be especially rich if there is a Democrat sweep of the election.

Take a look at these very bullish charts. The first chart shows the relative performance of the Industrial ETF (XLI) compared to the S&P 500. A rising line means that Industrials are outperforming the broad market. That has been the case over the past six weeks, in particular (as shown by the arrow).

Industrials are outperforming the broad market

Two of the winners here have been large equipment makers, Deere and Caterpillar. This chart shows their push higher after a two-year period of “rest”:

Large equipment makers are winners

And another couple of old line companies – Union Pacific railroad and General Motors. GM popped this week on word the company is converting a factory to build electric cars.

Union Pacific railroad and General Motors

Union Pacific is the largest holding in the Industrial ETF. Other large positions in the ETF are: Honeywell, 3M, the above-noted Caterpillar and Deere, along with laggards Boeing, Raytheon, and Lockheed Martin.

The overall point here is that the stock market has been quietly bidding up companies that benefit from a renewed economic cycle. The bet investors are making is that the economy continues to recover, albeit perhaps slowly, and that Congress ultimately invests some dollars in infrastructure – and does so within the next 3-6 months. If this group can hold up, it will be a bullish sign for the stock market broadly. As it will be if interest rates can hold up around 1.0%. This chart shows interest rates trending higher on hopes for an improving economy. This optimism runs counter, however, to the ongoing dire employment picture, which is substantially impacted by weakness in hospitality, travel, restaurants, etc. – all of which are facing a prolonged slump under almost any scenario. This is all the more reason why investors are betting on another round of government support/stimulus sometime soon.

Market Update

Stocks entered the thick of earnings season while caution was the predominant theme this week. Investors are focused on the ongoing Congressional stimulus talks, which are likely dependent on the election outcome, at least for the timing and details of the package. Monday brought a poor -1.6% market response as investors expressed skepticism a stimulus package would pass before the election. Stocks recouped +0.4% Tuesday when banker UBS posted solid earnings, continuing a string of better bank earnings. Additionally, copper prices furthered their recent move upward, a bullish sign for the global economy. China’s economic rebound has boosted industrial commodity prices of late. Wednesday found stocks off -0.2% after Netflix posted weaker than expected results. Corporate earnings pushed stocks to a +0.5% gain Thursday with Tesla, Hilton, AT&T, and Coca-Cola all receiving investor buying on earnings reports. Weakness in shares of Intel and American Express pushed markets down early Friday before an afternoon rebound brought indexes to a slightly positive +0.3% result.

Through the week, interest rates ticked notably higher, propelling bank stocks upward and helping the small-cap Russell 2000 to a +0.44% weekly gain. The broad market S&P 500 dipped -0.43%. The Nasdaq 100 (QQQ) slipped -1.31% with all of that loss coming in Monday’s trading session. The Nasdaq posted four straight days of very tight trading after Monday’s slide. The tech/consumer-heavy index does not contain any financial stocks, which were strong this week.

Warm wishes and until next week.