Summer markets are like washing machines in that there are different phases, and they churn a lot. That’s especially true of 2021 so far.
As we review our friends at MAPSignals’ Big Money Index (BMI), which tracks institutional investor activity and is a leading market indicator, it’s continued to fall as sellers come out of the woodwork.
We at Cornerstone are monitoring the data closely as the BMI has not been at such levels since April 2020. For perspective, if the BMI falls below 50% (currently at 52.9%), that tells us there have been more sellers than buyers over an entire five-week period.
But as our readers know, this could seem confusing because earnings have been stellar and the major indices have not exactly reflected the institutional data yet.
So how do we make sense of all this?
As anybody who watches the news headlines knows, the delta variants are continually getting people more nervous (and now lambda may be around the corner). But remember, fearful headlines sell.
Instead, we focus on data, which show vaccines are working, and that treatments for COVID-19 are significantly better. Plus, the recent uncertainty seems to have made many of the unvaccinated think twice and go get their shots.
With all that said, what is this latest COVID news doing to the market? It’s accelerating the washing machine cycle, especially in a low-volume month like August. We can see it in the recent BMI sector rotations:
Corresponding with the headline news narrative, we see buying in big tech and healthcare, while energy is selling off. Sound familiar? That’s what happened in 2020 too.
In more detail, within the tech sector, we're seeing buying in software, semiconductors, and networking equipment. There’s buying in biopharmaceuticals within the healthcare companies as well. Again, if this sounds familiar, it's what took place last year. The popular “go to” stocks are proving popular again, continuing the market’s churn.
The biggest selling on the news fears is specifically in oil and gas exploration, energy transportation, and their supporting companies. These are all investment decisions based on fear of a slowdown in the economy and restrictions on people (i.e., less travel).
But while these headlines are stoking anxiety and accelerating the washing machine narrative, the long-term trends indicate the economy is strong. And as we discussed last week, earnings back it up.
Additionally, recent economic news (other than last week’s inflation data) has been nothing short of stunningly positive, which counters the scary news. As such, we’ve identified four “data pillars” that reflect a strong economic foundation in the U.S. Keep them in mind while watching the news or hearing proclamations of imminent doom ahead.
Production is Up
The Commerce Department reported that factory orders rose 1.5% in June, which was significantly higher than the consensus expectation of a 1% rise. Over the past 12 months, factory orders have risen 18.4%. These data indicate rapid gross domestic product (GDP) growth for the remainder of 2021.
Jobless Claims are Down
In addition to the jobs report from two Fridays ago, last week the Labor Department reported that new weekly unemployment claims came in at 385,000, down from a revised 399,000 the week before.
Additionally, continuing unemployment claims were down to 2.93 million, from 3.296 million. Importantly, this is the first time continued unemployment claims have totaled less than 3 million since March 2020.
Manufacturing is Hot
The Institute for Supply Management (ISM) reported its manufacturing index came in at 59.5 in July. Remember that any reading more than 50 signals expansion. Thus, the July reading can undoubtedly be considered very strong.
Services are Hotter
The ISM’s non-manufacturing index (i.e., service) surged to 64.1, up from 60.1 in June. To put this in perspective, this is a HUGE sign for the economy since the ISM Service Index is at an all-time high.
To tie this all in a bow, while we are watching the BMI closely, the economic and fundamental earnings support we are seeing continue to indicate the prudent course is to ride out this summer volatility. In other words, let’s get through the cycles – all the rinses, all the spins – and we should be happy with the results.
The Value vs. Growth Spin Cycle
Two popular styles of investing – value and growth – have long track records of performance, enabling analysis over time. Over the past 15 years, growth stocks have won out over value picks, and it hasn’t been close.
But true to the washing machine nature of today’s market, things are shifting as swift as a spin cycle. We’ve now seen a full flip of the script, with value investing beating growth in the last year (handily), and this year too so far:
In the chart above, it’s clear value stocks outperformed growth stocks significantly. However, the gap has narrowed quite a bit with respect to the year-to-date returns.
This macro level view of the shrinking gap between value and growth supports the washing machine analogy, as more money is flowing into growth after value has been the lead dog for the past nine months or so. In other words, the spin cycle continues.
That said, the S&P Growth Index has outperformed its value counterpart over the long term:
So, what’s caused this transition over the last year?
First, we have to start with what makes up most of the largest sectors. Within growth that’s information technology, which is 40.6% of the entire index. In value, financials take the cake at 43.6% of the index.
The past 12 months have been a tale of two styles. Value stocks thrived when the yield on the benchmark 10-year Treasury note rose. And when the 10-year T note fell, growth stocks picked up.
For instance, from Aug. 6, 2020, through March 31, 2021, the yield on the 10-year T note increased from 0.54% to 1.74%. And over that period, the S&P 500 Pure Value Index posted a return of 51.09% compared to 17.18% for the S&P 500 Pure Growth Index.
But from March 31, 2021, through Aug. 6, 2021, the yield on the 10-year T note decreased from 1.74% to 1.3%. During that period, the S&P 500 Pure Value Index posted a total return of 4.19% compared to 20.27% for the S&P 500 Pure Growth Index.
This all indicates two other causes of the washing machine effect outside of news headlines – interest rates and the actions of the Federal Reserve.
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