They say the best defense is a good offense. The U.S. stock market may offer both.
To some, those big gains look like evidence of complacency, Friday’s 277.26 point drop in the Dow notwithstanding. There was plenty of bad news to go around. The number of coronavirus cases continued to grow, while estimates of China’s economic growth continued to fall.
economists see real gross-domestic-product growth of just 1% during the first quarter of 2020 in China. Germany’s industrial production, meanwhile, fell 3.5% in December, its largest post-financial-crisis drop.
To others, loading up on U.S. stocks looks like the right move. That’s because the world’s problems might actually make U.S. markets more attractive. Oil prices have dropped 20% since peaking at $63.27 a barrel in January, while the 10-year Treasury yield has fallen to 1.58%, and both could be signs of economic turmoil to come. But lower oil prices and interest rates also mean that Americans will spend less on gas and other essentials, leaving them with more cash to spend on other stuff, writes Gavekal Research’s Will Denyer.
“For all the growth uncertainties out there, one thing we can continue to count on is more positive contributions to U.S. growth from residential investment and consumption,” he explains.
He’s not the only one seeing upside amid the global turbulence. Fundstrat founder Tom Lee, in backing off a call for the market to fall, noted that U.S. stocks provide a haven for global investors when they start to worry about the economy.
Part of that is because the U.S. market is 57% growth stocks—issued by the kind of companies that can continue to prosper, even when economic expansion slows—and also because there’s more liquidity—jargon for the ease of buying and selling assets—in the U.S. than elsewhere.
These traits have made U.S. stocks attractive, but there isn’t enough supply to meet demand. The S&P 500 has a market cap of $25 trillion, while global household assets worldwide are about $300 trillion, Lee writes. “The U.S. stock market is the safest trade when the [rest of the world] looks dodgy,” he adds. “There is not enough S&P 500 to go around.”
Our optimism doesn’t go quite that far, especially in the short term. The week’s rally felt a little too central-bank driven. China pumped billions of dollars into its coronavirus-strained economy, while investors came away from Wednesday’s Federal Open Market Committee meeting feeling like the odds leaned toward lower interest rates. But when January’s U.S. jobs report came in stronger than expected, the market sold off, perhaps on fears that the easy money would dry up.
Even before Friday, cracks were developing. The NYSE advance-decline line, a cumulative measure of stocks rising versus those falling, failed to trade above its Jan. 16 high, even as the overall market rallied to records. Worse still, it has been making lower highs and lows, another sign that the market may not be as strong as it appears.
It could mean that the average stock is lagging behind, even as companies like
(ticker: AAPL) and
(AMZN) lead the market higher, writes Macro Risk Advisors’ John Kolovos.
And how long can that go on?
Read more: General Motors Stock Is More Like Tesla Than You May Realize
The Long and the Short
Here’s what else caught our attention this past week:
• Amazon finished up 3.5%, at $2,079.28, an all-time high, while stocks like
(KSS) ended with big Friday drops. As a result, the
SPDR S&P Retail
exchange-traded fund (XRT) has tumbled back to a relative low versus Amazon. The takeaway: After a brief respite, the “Death by Amazon” trade is looking very much alive.
(GE) rose more than 3%, to $12.83, and Gordon Haskett analyst John Inch, a longtime bear, grudgingly upgraded the stock to Hold from Sell. GE has now about doubled from its 2018 low, but it still has a long way to go before long-term investors recoup their money—its shares are still 78% below their all-time high of $58.16, reached in August 2000.
• Biogen (BIIB) gained 24% after it won a patent case that could extend its sole rights to multiple sclerosis drug Tecfidera out to 2028. But it looks more like a case of the market setting up for the binary bet that is
Alzheimer’s treatment, aducanumab. The drug failed a trial in March 2019, causing Biogen shares to plummet, but the company still plans to submit it to the Food and Drug Administration for approval this year. Whatever the FDA decides could make last week’s move look small.
• Remember when everyone was arguing that the U.S. dollar’s best days were behind it? Well, at its worst, the U.S. Dollar Index fell just 3.3% from its September high, and it rallied 1.3%, to $98.69, this past week. For now, it isn’t just the best home in the worst neighborhood. It’s the best home—period.
• Last week, we recommended buying
(PTON) before it reported earnings—and with the stock down 14% since then, boy, are we regretting it. Still, the drop looks like an overreaction to light third-quarter guidance and fears about an earlier-than-expected lockup expiration. We’ll stick with our call, for now.
Write to Ben Levisohn at [email protected]