While the markets rose nicely in October, they seem to be giving some back in November. Interestingly, there is a divergence worth noting. While the Dow Jones Industrial Average fell 1.4% this week, the S&P 500 remained mostly flat, and the Nasdaq rose 2.3%. Over the last four weeks, this trend is even more pronounced. One observation would be that the blue-chip companies in the DJIA may be more heavily affected by supply chain issues and rising input costs, compared to the more labor concentrated technology companies in the Nasdaq. That’s not to say technology companies are immune to the supply chain issues, but perhaps less directly than manufacturers and this is reflected in investors attitudes toward different types of companies in the three indices.
There continues to be a lot of economic data coming out which suggests the economic recovery remains strong. Also strong is the pace of inflation which doesn’t seem to be abating. Despite calls for inflation to be transitory, it will likely stay elevated at least through the first half of next year. One area we see the impact is at the pumps. If you’ve gotten gas lately, you might have noticed it costs quite a bit more to fill up the tank. In California, the average price for a gallon of gasoline is $4.54 with one station along the Big Sur coast charging $7.59 a gallon for regular unleaded and nearly $8.50 for premium. But despite the rising cost of… everything, retail sales remain strong, leading indicators are rising, and manufacturing data is strengthening. Rising costs will continue to pinch consumers and eat into whatever wage gains employees may have temporarily won.
On a another serious note, I wanted to tackle what I think is a trend that may be here to stay. I came across an article which asked, “Why does the market take 10% stock moves in stride now?” It wasn’t long ago that a 10% move would have been considered an anomaly. Something really good or really bad would have to have happened to make a stock jump (or fall) that much. Something like an unexpected merger or acquisition, or perhaps an SEC investigation into a company’s financial statements might do the trick. But these days, something as simple as a company announcing earnings may come in ten cents below analysts’ estimates or profit margins may shrink a couple tenths of a percent due to transportation costs can be the death knell for a company. Nvidia jumped 9% following earnings, adding nearly $70 billion to its market cap, while Alibaba fell 10%, shedding nearly $50 billion in market cap. Cisco fell 9% on Thursday, Traeger fell 14% on Tuesday, Petco lost 13% on Thursday, while Lucid gained 24%, Backblaze gained 22%, and Intuit gained 10% all this week.
While volatility is close to its low for the last 52-weeks, the issue comes when looking at stock dispersion. While volatility has remained muted at the index level, it is not so calm under the surface. Single-stock dispersion is running well above the average of the last 14 years. One reason could be retail investors with no-commission trading piling into distressed pandemic stocks. Unprecedented fiscal and monetary stimulus has boosted savings, with the retail crowd looking to deploy it where returns are best: growth stocks. As the retail money chases winners, algorithms kick in, creating a snowball effect on intraday moves. Another interesting theory is that the huge swings in cryptocurrencies may have contributed to an increased comfort level with jumps or falls of 10%. The third theory includes option trading in the broader market, with call-buying at historic highs and concentrated in large-cap growth. One analyst said the current options market dwarfs any previous cycle and is acting like an after burner for the overall market. And finally, the last theory is that everything just happens faster. The post-pandemic recovery is already looking more like a mid- to late-period economic cycle. One analyst put it this way, “This is an unprecedented time in market history. I don’t mean the bubble, that’s not new. What I mean is the speed of information and trades occur. My grandfather got quotes from the newspaper. I get real time level 2 market data on my phone. I get instant news alerts and stock movement alerts. Within seconds of a story hitting I can be purchasing that stock. That’s existed in some form for the last 5-7 years but throw in COVID boredom and it’s supercharged the phenomenon. You can’t rely on how the market used to move because there’s a fundamental difference.” I couldn’t agree more.
In closing, I wanted to share with you an “opportunity” that is too good to be true. If you are a Green Bay Packers fan (boo), you now have the chance to buy stock in the franchise. The team announced it is offering another 300,000 shares. You may not know but the NFL’s Green Bay Packers is a publicly owned corporation. Now before you get too excited, and I know you’re probably thinking, “what’s not to like,” the shares don’t act like stock in the traditional stock market definition of the word. They won’t have value that can appreciate, they don’t pay any dividends, and they offer holders no true say in the team’s operations – and they cannot be traded, only transferred between immediate family members. In essence, you’d be making a donation to the team. At $300 per share, the team looks to raise $90 million. Now you know.
Bruce J. Mason, MBA