The Covid Trade Range
So, here we are…
We’re seeing what we suggested would happen – a setback to the upper edge of the “Covid Trade Range.”
And the good news is that even weeks after the stabilization effort, and continued support from the US Fed, even a couple of days of red ink has scared the entire audience witless once again.
This is the type of atmosphere we look for to make some (hopefully) more educated decisions on the rebalancing benefits now spring-loaded into the marketplace.
Before we get to the latest graphs which we thought you may appreciate in all this noise, a couple of things are becoming more evident. Earnings season is going along pretty well, but several things are unfolding:
- Many companies are withdrawing guidance. Whether driven by Covid or not, this could be pretty good news in a few spots. First, it would hinder the black box trading often causing short-term gyrations based on the word "miss" in earnings releases. Second, it will provide the basis to proceed without these ridiculous 90-day interruptions along the way.
- Q2 discussions are all pretty much ugly unless you are a tech company and/or a someone providing goods in grocery stores. The latter will likely settle down as the world reopens and we get beyond this event. The former merely continues to express the powerful forces of The Barbell Economy - making tech a likely required piece of almost every portfolio going forward.
- It is likely we’re seeing a basis for new planning to make more productive decisions. Weeks ago, it was merely a guess in the frenzied activity of the illiquid liquidation in the waterfall panic. The charts below will give you a better feel for that stabilizing effort.
Obviously, some industries will recover very quickly while others will recover a little more steadily and then finally, several which just weeks ago were fine may take a little longer.
Note that several companies have suspended dividends (not ended, suspended).
Others are paying stock in lieu of the cash payment while others are putting things on hold with make-up plans before year-end (an IRS requirement for REIT's structures to exist).
This is a period we’ve never lived through so companies cannot really be blamed for some of those choices, as cash helps them to get through the window and position them for the M&As that we’re just beginning to see the first ripples of in the headlines.
Admittedly, the unique circumstances have placed what is normally a very steady flow of income into some question for the next couple of quarters.
The charts below show the trade ranges we discussed being formed, but you’re also seeing the difference between Tech (which will soon be over half of the S&P 500) and the broader regular market (The NYSE Composite which is still down 22%+).
They hint at substantial upside gains for even just getting back to old highs - which we suspect is far sooner than the now "years away" type chatter covering the airwaves.
The pain trade (the surprise) remains up - even when you get the ugly days:
The charts above are the one-year snapshots in order of:
- The Dow Jones
- The S&P 500
- The NASDAQ, and
- The NYSE Composite.
The common characteristic of the two best looking charts (S&P and NASDAQ) are TECH.
We would argue that we can’t use the S&P anymore as a guide unless someone owns about 52% in Tech.
Otherwise, the broad market is the director for most investors today.
Speaking of Fear…
Here is the data keeping the fear theme intact:
Across the board fear is hailing down on the psyche of the investor crowd.
No matter the channel - fund managers to individual investors - this is why it feels so foggy: The winning hand is to not look at "now" but focus instead on "what's next."
And that’s true even knowing that this is a stressful process.
A steady hand at the tiller is the best way to get through a storm, even if it looks pretty piss-poor at certain periods of time.
Snapshots are not the end. They are just a moment in time along the pathway that the media uses to make fear into a saleable commodity called headlines.