Published September 3, 2021
The S&P 500 has spent ten straight months above its 50-day moving average, one of history’s longest stretches of calm. Ultra-low interest rates from an extremely cautious and accommodative Federal Reserve have supported risk-taking investors by keeping the cost of money near zero. Very strong corporate earnings have rewarded investors by expanding the ‘E’ in the P/E ratio, justifying the market’s run upward. See the leap in corporate earnings in the blue bars below.
This past quarter saw the most companies ever beating their sales and earnings projections with fully 4 out of 5 companies coming in above estimates (chart below).
When the market has taken pause, every dip in stock prices over the past ten months has brought in buyers. Investors have adopted a game of sector rotation as their primary means of varying risk – using the mega-cap FANGMA stocks as safe-havens. As a result, Microsoft has traded in ‘overbought’ territory for a full FOUR YEARS now!!! Old-line value investors must scratch their heads at using such high-flying stocks as portfolio ballast.
This rush to FANGMA stocks as a safe-haven is found in the disparity between the S&P 500 and small-cap stocks.
The rollover in small-cap stocks back in March coincides with the peak in interest rates. We can view that coincidence as supporting a general reduction in risk appetite among investors; first brought about by concerns around possible inflation, followed by the more recent fears of a slowdown in China, and the looming uncertainty around the impact of the Delta Covid-19 variant. Of course, we cannot ignore that small-cap stocks also recovered from the early Covid-driven selloff with a spectacular rally. Over a one-year timeframe, small-cap stocks have still outperformed the large-cap S&P 500.
Many analysts are calling for a fall market swoon to work off some of the market’s perceived excesses. But it could be as it has been, stocks running mostly in place, buying time while the wall of worry builds and builds to kick off a new uptrend. The past couple of weeks have seen yet another buy-the-dip move with the small-cap Russell 2000 touching its support line and lifting off once again.
Eventually, the streak of wins will break. With any interest rate moves by the Fed still many months away, it’s very unclear what will cause this market to do anything more than pause.
Investors carried over their good cheer from the prior week into Monday’s session to leave the indexes +0.4% higher. Growth stocks, many found in the Nasdaq, continued their recent outperformance as interest rates have pulled back. Fed Chair Powell’s speech the prior Friday ignited a short-term rally as investors read his comments as being cautious on any interest rates hikes for the coming quarters. Stocks posted a flat finish Tuesday to bring a successful month of August to a close. The first trading day of September was also flat with investors looking ahead to the monthly jobs report for the next clue on the economy. A sharp rise in oil prices brought money into energy stocks Thursday while a tepid unemployment report kept investors believing into a continuation of easy monetary policy. Stocks lifted +0.4%. Friday brought the jobs report and a mixed reading from investors as stocks ended the week on a flat note.
Another modestly positive week for stocks. The S&P 500 added +0.63%. The Nasdaq 100 (QQQ) rose 1.47%. Smallcap stocks lifted +0.68%.
Warm wishes and until next week.