Comfortably Numb

Comfortably numb.  Stocks rose yesterday, rallying into the close despite rising infections.  Tech shares led the late-session rally, indicating investors blurry vision of the near future.

 

N O T E W O R T H Y

 

The rearview mirror.  The saying that “hindsight is 20/20” is especially relevant on Wall Street. Even the pros get caught saying things like “I knew Apple was a buy in 1984, it was obvious”, or “I knew Elon Musk was genius, he didn’t really mean the things he tweeted”, or finally “I knew that Netflix would figure out a way to convert their dying DVD rental business into a mega media company”.  But did any of them actually buy?  Most likely not. These high-flyer companies fall into a group of stocks referred to as Growth Stocks.  Growth stocks enjoy some unique benefits in that they don’t have to earn a lot of income, pay dividends, or have solid balance sheets.  They are judged by earnings growth and future prospects.  Earnings growth is simple.  If you earned $1,000 last year and $2000 this year, your income increased by +100%.  Compared to the old, solid, household-named value companies that pay dividends, have strong balance sheets, earnings in the 10’s or 100’s of millions, and serve mature, well-understood markets, a +100% earnings growth is outstanding.  A growth company can even be applauded for losing less than expected, that is of course, assuming that they have good future potential prospects.   The problem with future prospects is that, in many cases, we are simply making educated guesses on what could be.  Now to be crystal clear, if those guesses work out, the returns can be astounding, and some of them were.  In 1984, Apple was one of those companies with good prospects and a visionary leader that was not necessarily popular with Wall Street’s old guard.  But for the few that saw the potential for a silicon valley upstart to overtake a behemoth like IBM, steadfastness paid off.  Similar companies like Microsoft also made the case for growth companies, handsomely rewarding faithful investors.  This led to a new generation of companies with great future prospects, and most of them found a home on the Nasdaq exchange.  The Nasdaq was a good starting point because, at that time, its listing requirements were far less stringent than those of the rock-solid, old-guard NYSE.  So the Nasdaq became the superlative representation of growth companies with great prospects.  We now have a whole new generation of growth companies which top the headlines almost daily.  FANG became a thing a few years back, coined by Jim Cramer.  Facebook, Amazon, Netflix, and Google (FANG) soon became FANG+, which evolved into FAANG+ (don’t forget Apple), and finally settled in on FAAMG+ to pay homage to Microsoft.

 

In this last economic expansion, faith in future prospects has paid off!  If you invested in the FAAMG+ stocks 5 years ago, your return would have earned +340% total return, which is in sharp contrast to the +68.7% you would have earned if you invested in the Dow Jones Industrial Average (even though MSFT and APPL are both part of that index). If you look at those numbers year to date, the differential is even more stark.  This year so far, the FAAMG+ stocks rose by +48.32% and the Dow Jones Industrials lost -8.66%.  The Nasdaq Composite Index offers a broader and, perhaps, more realistic view of growth stocks, returning +16.94% year to date (it made its 25th all-time high yesterday).  Why is there such a sharp discrepancy between the two?  In times like these it becomes difficult to assess economic and company performance.  Companies themselves are having a hard time projecting earnings just three months out.  That makes for difficult investment decisions. However, if you are willing to have faith in the future prospects of a company, the buy decision becomes easier.  As aforementioned, growth stocks boast high earnings multiples based on faith.   If one can find a growth company that seems to be insulated from economic turbulence, all the better.  That is precisely why, especially on days like yesterday in which the virus headlines were grim, traders clamored for growth stocks… er… faith in future prospects. Hindsight is 20/20 and it shows us that growth stocks don’t always outperform and that many growth darlings have failed miserably.  That is why longer-term investors need to be diversified to be able to thrive in all market conditions… though a little faith is always good.

 

THE MARKETS

 

Stocks rose in yesterday’s session led by tech shares as investors digested an ever-increasing virus count.  The S&P500 climbed by +0.78%, the Dow Jones Industrial Average traded up by +0.68%, the Russell 2000 added +0.81%, and the Nasdaq Composite Index jumped by +1.44% to a new high. Bonds climbed slightly and 10-year yields slipped by -1 basis point to 0.66%.

 

NXT UP

 

– Initial Jobless Claims (July 4) are expected to have increased by +1.375 million claims, down slightly from last week’s 1.427 million.

– Continuing Claims (June 27) may have slid to 18.8 million from 19.29 million.

– Atlanta Fed President Raphael Bostic will speak today.

– This morning Walgreens Boots Alliance missed earnings estimates by -30%.

 

 

daily chartbook 2020-07-09