Smart News - Signs of Rotation?
Signs of rotation?
If you’ve been reading our blogs over the last few weeks, you will be aware of the considerable market interest in five heavyweight tech stocks. To recap, a combination of Alphabet (Google’s parent company), Amazon, Apple, Facebook and Microsoft make up close to a quarter of the S&P 500 by market capitalisation. Together, their value is up over 30% since the beginning of this year while other S&P 500 constituents have lagged noticeably. The coronavirus pandemic and the associated lockdown has seen these tech giants flourish as their respective business models prove resilient to Covid-19. By contrast, we’ve seen devastation across a wide range of industries including property, bricks-and-mortar retail, airlines, leisure and hospitality.
This isn’t the first time we’ve seen tech stocks take a dominant role in the market. Back in 2013, Jim Cramer, the host of CNBC’s Mad Money, coined the acronym ‘FANG’ as shorthand for Facebook, Amazon, Netflix and Google (now Alphabet). Apple was a later addition, expanding the term to FAANG in 2017. These companies regularly topped the tables showing investor holdings as they supplanted old school stalwarts such as Alcoa and GE. There was a significant shift away from steady and reliable dividend-paying corporations that supplied goods and services, towards tech-driven companies like Facebook where harvesting customer data was the prime activity.
Even before the coronavirus pandemic, the tech giants were doing well. But the stunning gains in their stock prices following the broad-based market sell-off from mid-February to mid-March this year took many observers by surprise. Commentators have been wondering how long this trend could continue. Some have even made comparisons to the current situation and the lead-up to the Dot-Com crash at the beginning of this century. But while plenty of analysts are keen to point out just how ‘overvalued’ such stocks are by many traditional metrics, it’s difficult to see how the current situation bears much resemblance to the mania that surrounded the Dot-Com boom twenty years ago. For a start, the corporations we’re considering here aren’t just pipe dreams with daft names. Each one dominates in an area which is fundamental to the way most of us now live our lives. That’s why savvy investors bought shares in Amazon, years before the company was able to post a profit.
But an overvalued stock is an overvalued stock and this situation can persist from a very long time. But eventually it becomes too hard to resist the temptation to cash in. Could that be happening now? This week traders booked some profits on the tech sector and invested their gains on a number of stocks that have underperformed so far this year.
By mid-week, the tech-heavy NASDAQ 100 was down 2% from Friday’s close. In contrast, the Russell 2000 (an index of smaller US companies) rose 2% over the same period. The shift came on hopes that a coronavirus vaccine would soon be available. This lifted those companies most likely to benefit from an end to the lockdown such as Boeing, Carnival, Norwegian Cruise Lines and Gap, while the news provided yet another reason to sell big tech.
Also, since the start of this month there have been signs of life in airline stocks, both European and US. Heavyweights like American Airlines, Delta, Southwest Airlines, Ryanair, easyJet and IAG have enjoyed a strong move higher so far in August. Why should this be? Some analysts have pointed to recent headlines focusing on passenger numbers. According to the Transportation Security administration (TSA), airline passenger numbers in the US are running at their highest levels since the start of the pandemic. But these numbers are still almost 70% down from this time last year. That doesn’t bode well for airlines who cannot hope to be back in profit anytime soon. It’s unlikely that passenger numbers will recover much more in the near future, despite attractive discounts on tickets. For a start, we’re coming to the end of the holiday season. Also, as we change the way we do business, it seems unlikely that highly lucrative and frequently flying business class passengers will be returning soon, if ever. Perhaps the real reason for the rally in airline stocks is the hope of a second $25 billion bailout for the sector. If so, this had better come quickly.
Taking a look at this week’s ‘Highlights’ feed on Smart News, there is still plenty of chatter around Simon Property, the biggest owner of shopping malls in the US. Its shares have fallen around 60% from its pre-Covid price in February. On Monday, the company released a disappointing set of second quarter earnings. But the shares rallied sharply after the company announced that it is in talks with Amazon to transform some of its department store spaces. The idea is to convert spaces previously occupied by big retailers like Sears and JC Penney into Amazon fulfilment centres. Other hot topics picked up by the Smart News feeds include chatter around Cisco earnings and the stronger-than-expected rise in the US Consumer Price Index. We can expect an uptick in social media mentions of US Retail Sales ahead of its release on Friday.
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