Bob’s Journal for 3/11/21

The Big Rotation in Stocks

The winners and losers in U.S. stocks were stable, until recently.

For years, U.S. growth stocks, especially technology stocks, regularly outperformed other categories of stocks. Investing in the large U.S. indexes, such as the S&P 500, was an easy, inexpensive way to earn high returns.

Those trends started to shift late in 2020 and recently shifted even more.

The technology sector of the S&P 500 is below its 50-day moving average and continuing to decline.

Meanwhile, the energy sector is well above its 50-day moving average and around its 52-week highs.

In the last six months, technology is up 4.5%, while energy is up 40%.

Here’s a broader look at the changing trends as of last Friday. The Nasdaq 100, which has been the top-performing index most of the last few years but especially since the pandemic lows about a year ago, is down more than 8% since Feb. 12. The S&P 500 is down 2.31%.

But the Dow Jones Industrial Average is up 0.25% in that time. The S&P Small Cap Value Index is up 7.06% since then and 15.96% for the year to date.

We’ll see how long these trends last. But for now, large company stocks and technology stocks are fading. Instead, value stocks and old-fashioned industrial and commodity company stocks are surging ahead.

Momentum, Pandemic Stocks Fell Fast

The changes are more significant when we look at individual stocks. After markets hit their pandemic lows about a year ago, a group of stocks were favored strongly by investors.

Many of the stocks initially were purchased because investors believed their businesses would thrive in the pandemic. After a while, it seemed momentum investing dominated the markets and continued pushing these stocks higher.

More recently, those stocks gave up a lot of their gains.

Bespoke Investment Group last Friday prepared a list of the stocks in the Russell 1000 that were selling at prices the farthest below their 52-week highs.

The 42 stocks on the list were selling at an average of more than 46% below their 52-week highs, while on average the other stocks in the Russell 1000 were a little more than 12% below their 52-week highs.

Many of the names on the list probably aren’t familiar to you, but some are well known.

Among the biggest decliners are Virgin Galactic (down 57.26%), Zoom Video (42.80%), Peloton Interactive (42.53%), Lending Tree (40.96%), Beyond Meat (40.91%), Teladoc Health (40.39%), and Zillow (36.99%).

The list is composed mostly of smaller companies. But larger companies in the Russell 1000 also are doing poorly for the most part. The 30 largest stocks in the index collectively have lost more than $1 trillion since the Feb. 12 peak, and the six largest have lost over $800 billion.

Early Signs of Inflation Appearing

Federal Reserve officials insist they are a long way from being concerned about higher inflation. But it is easy to see why bond investors have started to be concerned.

The ISM Manufacturing Index issued last week found that prices of inputs for manufacturers were significantly higher. In addition, the manufacturers reported being able to pass cost increases on to their customers. The National Federation of Independent Business (NFIB) Small Business Optimism Index told a similar story.

The New York Fed’s survey of consumers found that the average household expects prices to increase. The survey indicated that inflationary expectations for the next year are at their highest level since July 2014.

Consumers expect inflation to be 2% or higher in both the next year and three years. In three years, consumers expect inflation to be 3%. The biggest price increases are forecast for rent and gasoline.

Yet, the survey found households expect their income to increase only 2.45%. The income expectation fluctuated from 2.5% to 3.0% for the three years before the pandemic.

The Data

New unemployment claims for the latest week declined to their lowest level since the pandemic began. New claims numbered 712,000, compared to 754,000 last week, which was revised higher from the 745,000 initially reported.

Before the pandemic, the record high for claims in one week was 695,000.

Continuing claims declined by 193,000 to 4.1 million. This also is the lowest level in the pandemic period.

About 20 million Americans are receiving some form of unemployment compensation.

Small business owners gradually are becoming more confident.

The NFIB Small Business Optimism Index was 95.8 in February, compared to 95.0 in January. The index was 104.5 just 12 months earlier.

The business owners said their biggest problem was finding suitable workers. Most business owners aren’t planning to increase investments or spending because of uncertainty about the path of economic recovery.

But small businesses are raising prices at the highest rate in 12 years. The business owners report strong consumer demand is causing supply problems and triggering the price increases.

Last Friday’s Employment Situation reports said the economy created far more jobs in February than economists expected.

A total of 379,000 new jobs were created in February. The leisure and hospitality sector won big and added 355,000 jobs, according to the Labor Department survey. Bars and restaurants added 286,000 jobs, while hotels added 36,000 jobs.

Leisure and hospitality still had 3.5 million fewer jobs than a year ago, and its unemployment rate is 13.5%.

The labor market didn’t change much in January, according to the JOLTS (Job Openings and Labor Turnover Survey) report from the Department of Labor.

The JOLTS report said the number of job openings, hires and separations was about the same in January as in December.

Over 12 months, there was little change in the total number of job openings in the economy. Significant job losses in some industries (accommodation and food services; state and local government; arts, entertainment and recreation) were offset by significant increases in job openings in manufacturing, mining and logging.

Consumer credit use declined in January by 0.4% after significant increases in each of the previous four months.

Revolving credit, which is mostly credit cards, declined 12.2% for the month. Nonrevolving credit, which is mostly auto and student loans, increased 3.2%.

Over 12 months, total credit declined 0.1% and revolving credit declined 11.2%. Nonrevolving credit increased 3.9% over 12 months.

The Markets

The S&P 500 rose 2.14% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 3.30%. The Russell 2000 increased 3.60%. The All-Country World Index (excluding U.S. stocks) added %. Emerging market equities declined 2.26%.

Long-term treasuries rose 0.34% for the week. Investment-grade bonds lost 0.66%. Treasury Inflation-Protected Securities (TIPS) added 0.25%. High-yield bonds lost 0.36%.

In the currency arena, the U.S. dollar increased 0.86%.

Energy-based commodities climbed 2.47%. Broader-based commodities rose 0.79%. Gold gained 0.55%.

Bob’s News & Updates

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