is there really a counter-trend rally underway?

A short while ago, I began to think that what I considered extreme performance and valuation differences between the NASDAQ index vs. the Russell 2000 (large multinational techy companies vs. medium-sized domestic firms) had become so wide that there had to be a period of catch up, when the R2000 would significantly outperform NASDAQ.

I thought it was possible that the R2000 might outperform by, say, 15-20 percentage points over a two-month period. The trigger could well be evidence emerging that the worst of the pandemic in the US was behind us. I was also noticing that I was checking my stock accounts closely almost every day–something that my experience has taught me to be a reliable sign that my holdings are getting near-term toppy.

The turn toward domestic, business cycle-sensitive names started shortly after I wrote about the possibility. BUT the move has stopped dead in its tracks this week. My reading of prices says that the market no longer wants to make this turn.

Of course, I could be wrong, as portfolio managers often are. And I’m not removing the small pro-domestic economy bet I made based on my sense that a market rotation was imminent.

What has changed?

Keeping in mind that the “what” is less important than the “that,” it seems to me that the show-stopper has been the White House. It’s the fact that new coronavirus cases in states like Florida, Texas and Oklahoma, which have relaxed social distancing precautions at Trump’s urging–and against the advice of medical authorities, are spiking sharply upward.

Trump is also launching a series of his signature political rallies, even though such events appear to be prime breeding grounds for infection. The Trump campaign has booked a 20,000 seat arena for the event, but claims to have requests for over a million tickets–which would be about half the adult population of the state, and well ahead of the number of votes Trump garnered in OK in 2016. None of this makes a lot of sense to me, nor apparently to Wall Street.

My guess is that at least until this situation sorts itself out the pro-business cycle rally is on hold.

once the worst has passed–Instacart

It’s probably not too soon to start imagining what changes there will be in daily life once the coronavirus is under control.

home food delivery

Online ordering through Whole Foods or Amazon has been impossible.  The wait for a Costco delivery slot has been two weeks+   …until yesterday, when suddenly (I hadn’t looked for a while) slots for same-day as well as every day for the next week were available.  Everything I ordered was in stock–delivered three hours later  …another change.

To me this suggests that panic buying has subsided.

Instacart

What really caught my eye is Instacart, which powers many food delivery services.  Not in a way that makes me itching to invest, though.  The markup on the food was 26%, after including a 5% tip.  That’s a lot, I think.  For a family of four that spends $1000 a month on food, Instacart would cost an extra $3000+ a year.  During a pandemic, this is probably not an issue for most people.  But in normal times, this seems pretty steep to me.

I don’t think home delivery will go away.  But it seem to me that potential new competitors have lots of room to undercut Instacart’s markup.  Also, it would seem to me that delivery from centralized warehouses is inherently less costly than hiring someone to shop in a supermarket in your place.

a surprisingly hardy breed

A caveat–two, actually:  I’m not an expert on supermarkets; grocery is, to me, a weird and wacky industry, with greater staying power than I would ever have imagined.  My town, for example, offers only a number of very dated, inefficient food stores.  A national chain has been trying to build a superstore for over twenty years on commercially zoned land it bought from a department store moving to a nearby mall.   Protests by “citizens’ committees” funded by the incumbent grocers have blocked redevelopment, as I understand the situation, despite the deterioration of the neighborhood as small businesses in need of an anchor have left.

The economics of physical grocery stores is also more complex than I would have thought–all mixed up with payments from manufacturers for premium space, the role of house brands, ancillary services like banking or a pharmacy…

Anyway, this is to say that supermarkets may be harder to kill than it seems on the surface (just look at department stores, which have been dying for almost fifty years).

 

opening back up?

The US as a nation is beginning to relax the most severe social distancing measures put in place to make sure a tidal wave of COVID-19-infected people wouldn’t overwhelm the medical care system.

I have no idea what’s going to happen as we recover, but I’m willing to hang my hat on two ideas:

–the key issue is hospital capacity, and

–that reopening will continue, with the throttle being opened or choked back, not by the number of new virus cases, which I think will likely rise, but by the availability of hospital beds.

 

The stock market senses this policy shift and is starting to react.  “Starting” may be a bad word.  The Russell 2000–mid-sized firms with revenues and costs in the US–was down by 40% ytd a month ago.  It has risen by about a third since then, meaning it’s still down by a bit more than 20% ytd.

Banks, hotels, cruise lines, restaurant chains all show similar patterns.

Just as important, secular growth, capital flight tech names, which have been very strong so far this year (MSFT is up by 10%, for example, the ARK Genomics ETF is +20%  (I own both (btw, I really like the ARK people and own several of their ETFs)), are beginning to lose steam.  (This is really a horrible sentence.)

What to do?

This is, of course, mostly an issue of investment philosophy and risk tolerance.  For what it’s worth, I’m very aggressive, have a portfolio I actively manage, where I’m very heavily weighted toward tech.  I’ve begun to shift a tiny bit toward the names that have been crushed by pandemic fears.

So far I’ve bought a Russell 2000 ETF and established a small position in Marriott (MAR).

I’ve thought about the cruise lines, which are the swing for the fences “value” bet, and decided I don’t know enough and don’t want to take the risk.   There should be (I haven’t looked) a ton of very recent information on the SEC EDGAR site about Carnival (CCL) given the company’s recent financing, which should give prospective buyers some comfort.  But at the end of the day I can imagine taking a small-boat river cruise but I’m not a CCL customer.

I also thought about Boeing (BA), but I’m not sure I have any clue about the depth of incompetence and corruption involved in the company’s newest commercial aircraft development.  My experience suggests we’ve only seen the tip of the iceberg.  The counter-argument is that BA has a substantial defense business and that it’s one of only two major aircraft manufacturers in the world.  So it can’t be allowed to fail.  I’m passing, though.

(An aside:  the key to investment success is not to have an opinion about everything;  it’s to know more than most about a few things that you monitor carefully.)

Why MAR?  A simple answer is fewer warts than CCL or BA.  I know something about the company and use its products.  Also, by and large, publicly traded hotel companies don’t own the physical hotels.  They provide branding, property management and reservation system services, in return for taking the lion’s share of profits.  Yes, less upside than with property owner CCL, but also less risk that my ignorance will come into play in a bad way.

Assuming I’m correct about this market shift, is this just a counter-trend rally?  Yes, but…  There may be a quibble about the word “just”;  but this domestic-centric rally could go on for months.

At some point it will be important to have ideas about how the post-pandemic US will be different.  I’m not sure that’s right now, though.  I think it’s better to be trying to figure out which firms will lose their appeal in a post-pandemic world–and use them as a source of funds to play the current rally.