Six stocks to watch
Six stocks to watch
The US Presidential Election took place less than three weeks ago, although it feels like an age has passed since then. Despite the fact that Joe Biden is widely referred to as President Elect, a significant number of people still question the election result. But as far as US equity markets are concerned, it matters little. The White House incumbent may soon be a Democrat, but the Republicans built on their Senate majority while gaining seats in the House of Representatives. This means that Congress is gridlocked. The feeling is that nothing of significance will change, which is what investors like best.
Vaccines on the way
Of course, life and the financial markets march on. Relevant to both was the announcement of not one, not two, but three vaccines which have the potential to protect most, but probably not all, of the world’s citizens from coronavirus. The logistics of vaccinating 7.8 billion people aside, this is undoubtedly good news. But not for Donald Trump, for whom the announcements came too late for him to capitalise on, as has the rally in global stock indices since early November.
The rally since the beginning of this month has seen the S&P 500, Russell 2000 and Dow Jones Industrial Average surpass previous highs to hit all-time records. The Dow managed to tip its head briefly above the psychologically-significant 30,000 level before giving back some gains. Even the arcane, and generally ignored, Dow Jones Transportation Average hit a fresh record this month. For more seasoned analysts, this is often taken as an indication that further stock market gains are possible, on the calculation that a wide, broad-based rally has a strong base from which to push higher.
But there’s one significant sector where stocks aren’t hitting new highs and some analysts are expressing caution. The tech-heavy NASDAQ 100 is the major US index that has conspicuously failed to take out its record peak hit in early September. Some analysts are concerned about what this may be signalling for the wider market. The reason being that the NASDAQ 100, and in particular a small handful of key tech corporate giants, has led the wider market for some time now.
Alphabet (Google’s parent company), Amazon, Apple, Facebook and Microsoft, have dramatically outperformed the broader market since the beginning of this year. Investors have swarmed to the shares in these companies to such an extent that these five stocks account for over 20% of the value of the S&P 500 by market capitalisation. But their influence on the NASDAQ 100 is even greater. To put these five stocks into perspective, they occupy the top six slots in terms of their weightings in the index. That’s six because there are two classes of Alphabet shares. Not only that, but the next biggest stock in terms of its weighting is Tesla Motors. Add up those weightings and these six companies account for just under 50% of the value of the whole index. In other words, they’re effectively worth the same as the rest of the index combined.
Since hitting the bottom of the coronavirus pandemic sell-off at the end of March, these stocks have made tremendous gains. Facebook and Amazon have effectively doubled in price and Alphabet is up 75%. Microsoft has ‘only’ managed a 59% gain while Apple has tacked on a respectable 120%. But Tesla has blown everyone out of the water with an outstanding gain of 638%. Given how much these stocks have rallied since March, it’s perhaps unsurprising that they can have an outsized influence on major indices if investors look to book profits, and that’s what has happened to an extent. While Alphabet is currently trading near its all-time high, shares in the other tech majors are trading below their previous best levels hit at the end of August and early September. The big question now is whether they have experienced enough of a correction and consolidation for buyers to return, or if selling momentum picks up from here. It’s this dynamic which should decide how the major US stock indices behave in the lead-up to Thanksgiving next week.
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