While investors are working themselves into a frenzy about whether or not the current stock market rally is about to go into hard reverse, there are a few things to keep in mind.
The overhead level of resistance for the
S&P 500 is 2800; the commonly accepted number that stocks would either breach and move higher or would smack it like a ceiling and fall. The latter just happened.
The yield curve (the difference between short and long term Treasury yields) narrowed.
The ECB (European Central Bank) is once again having to pull more stimulus tricks out of its hat.
Chinese economic stats were reported to be much worse than expected.
U.S retail sales over the all-important Holiday period were weak.
U.S. GDP is meh.
U.S. economic activity slowed sufficiently to get the FED to back down from its "normalization" goal.
Stocks just posted their worst week so far this year, for a 5-day losing streak as investor sentiment turns sour.
I could go on about the reasons why the global economy is slowing and why investors find fear and loathing every time they look at stocks, despite the strong, double digit advance in the major averages during the first two months of this year. The lightning speed in which stocks entered bear market territory at the end of last year and then bounced back this year, so far, is leaving a lot of investors wondering how we got to this point. And now that the rally is fading, for now, anyway, I'd like to turn your attention to a post by Nick Colas of DataTrek Research. This is the best thing I've read that explains late last year and early this year. I think Nick's research and perspective are spot on.
From his post:
As we looked at the performance for 2018's losers we got to wondering, "Which S&P 500 stocks are 2019's biggest winners?"
We arbitrarily cut off this list at a 40% YTD gain and also pulled the data for how they performed during just December 2018. Here is the data, starting with the best performing name and working our way lower:
- Xerox (XRX): +56.1% YTD. December 2018's return: -37.7%
- Delphi Technology (DLPH): +52.2% YTD. December 2018's return: -16.2%
- HanesBrands (HBI): +45.8% YTD. December 2018's return: -21.2%
- Mattel (MAT): +45.8% YTD. December 2018's return: -28.2%
- Xilinx (XLNX): +42.5% YTD. December 2018's return: -7.9%
- Chipotle (CMG): +42.1% YTD. December 2018's return: -8.8%
- Hess (HES): +40.1%. December 2018's return: -24.8%
And the averages/comparisons to the S&P 500:
- Average for these 7 names: +40.6% YTD. Their average December 2018 price return: -20.7%.
- For reference: S&P 500: +10.6% YTD, December 2018's return: -9.2%
Nick adds: That's how you end up with Xerox as the S&P's top stock for the year. This is a name that hasn't gone anywhere for half a decade, after all.
Readers will recognize this phenomenon as the "January effect", but at least for 2019 it is more like the "January and February effect". A look at the 8 winning names from the list above shows that all of them reached peak YTD returns in the second month of the New Year, not the first. We attribute that to the unusually large amount of tax loss selling in December 2018.
Back to Mitch: Xerox being up the most isn't exactly what I would call inspiring, as this is not a super high quality name. In fact, the list above is filled with second and third tier stocks, with Chipotle as the exception. As a branch manager used to say to me about stocks like these, "these are the ones you borrow, not own". I call this the Rodney Dangerfield rally because it gets no respect. Nick calls it the George Costanza rally for basically the same reason.
In summary, once the January effect wears off, investors will have to find something else to lean on. From my nearly 30 years of financial industry experience, rallies built on lower tier stocks could be powerful, but they're not the ones to hold onto.
Follow Nick on Twitter so you don't miss any of his posts: @DataTrekMB
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