Possibly a correction
Concerns that Covid variants could have an impact on the global economy prompted a sell-off in global stock markets. The Dow dropped 725 points, or about 2.1 percent. The 10-year Treasury yield, which has been falling for weeks, has now fallen below 1.2 percent.
The drop in bond yields is being viewed by investors as a “canary in the coal mine,”. The 10-year yield fell to 1.17 percent on Monday, down from around 1.3 percent. Bond yields are falling as bond prices rise.
The S&P500 was down 1.6 percent on the day, closing at 4,258. According to Stovall, the S&P500’s correction could be as much as 10% to 15%, with the index reaching its 200-day moving average of 3,895.
“It will most likely end up being a correction rather than a pullback,” Stovall predicted. “Not a new bear market, but a meaningful correction [in stocks] that will adequately reset the dials.”
A dwindling rally
Earlier, Morgan Stanley’s chief U.S. equity strategist Michael Wilson wrote in a note that the rally was showing signs of exhaustion and that investors should shift to defensive sectors. He believes the market is in transition and could experience a 10% to 20% correction.
The 200-day moving average is a popular technical indicator that represents the average of the last 200 closing levels. It can be a level of assistance.
“Bond investors are certainly questioning the reopening, and we had a sense of that even before,” said Jack Ablin, Cresset’s chief investment officer. “Certainly, there is legitimate concern, but I believe that when we get to the other side of the hill, we will return to whatever it is, a stable state, and I continue to believe that interest rates are simply far too low.”
According to Ablin’s model, the stock market could experience an 11 percent correction. “I wouldn’t take this as a signal to leave. There is, without a doubt, a peak in growth and profits. I believe it is a correction. I would be concerned if credit spreads began to widen and lenders began to restrict credit, which we are not seeing at all.”
Is growth reaching its apex?
The economy is expected to have grown by about 9% in the second quarter and by 7% to 8% in the third quarter. Profits for corporations are expected to have peaked in the second quarter, with a gain of more than 65 percent.
Cyclical stocks that had benefited from the reflation trade saw some of the steepest declines on Monday. Oil fell more than 7% after falling 7% the previous week. Monday, energy stocks fell 3.6 percent, financial stocks fell 2.8 percent, and industrial stocks fell 2.1 percent.
The drop was also attributed to fears that inflation would force the Federal Reserve to reverse its easing policies sooner than expected, putting a damper on growth.
According to Steve Sosnick, chief strategist at Interactive Brokers, the pullback does not indicate a correction, but it does indicate that investors are changing their outlook on the market.
“What we’re seeing today is that people are being forced to reprioritize their purchases. When that happens, I think you’re less likely to get a snap back rally than when it’s just a regular overbought situation,” he says. “I believe that is the difference between today and some of the other dips we’ve seen. This could be more long-lasting. But I’m not suggesting that you sell everything and flee to the hills.”
“I believe you are seeing a shift in the narrative that people are using to make pricing decisions today. “I believe it is dependent on Covid,” Sosnick said. “It depends on the Fed providing more clarity. The infrastructure bill, I believe, will depend on more clarity from Washington.”
“The question is, ‘What’s your next catalyst?” he inquired. “The bond market tells you that the catalyst is lower growth, a flight to safety, and deflation.” Choose your poison. None of them are marketable. It’s the worst buffet ever.”
Dan Niles adjusted his Covid positions
Because advertising accounts for the vast majority of the social media giant’s revenue, the hedge fund manager sees it as an economic recovery play. “Remember, advertising is tied to GDP growth,” he said in April, when he also argued that Alphabet, the parent company of Google, was a reopening winner.
“They get advertising from airlines, hotels, and shopping malls. All of those industries have perished. “These two stocks have continued to rise,” Niles said Monday, despite the fact that investors have been questioning the pace of the economic expansion since early June and have sold out of cyclical names as a result.
“That’s why we took some profits because we thought, ‘That doesn’t really make sense if all the reopening stocks are down.’ The guys who benefit from the reopening on the tech side are up; there’s probably a little bit of catch-up that needs to happen there, which is why we did what we did last week.'”
He noted that his fund still owns “a little bit of” Alphabet, but he reduced the size of the position to capitalize on the gains.
While Niles manages a tech-focused fund, he says, “if we’re looking at reopening, we’re not looking at tech names from here.” What we’re looking at more are things like energy, finances, or materials,” Niles explained, adding that they’ve been “absolutely destroyed” since early June.
The S&P 500 energy sector is down about 16 percent since its 52-week high on June 15, while the materials sector is down more than 10 percent since its one-year high on May 17. Since its 52-week high on June 4, the S&P500 financials sector has fallen slightly more than 8%.
Niles believes that tech companies that cater to businesses rather than consumers directly are more appealing right now in terms of reopening.
“I believe our largest position right now is Cisco,” he said. Companies use the company’s network switches and Wi-Fi access points in offices, making it a potential beneficiary as firms shift away from mostly remote work arrangements. “When we look at that, we see very little consumer and a lot of enterprise,” Niles said.
Despite concerns about a rebound in Covid cases and the highly transmissible delta variant, which were hitting the market hard Monday, Niles said he still likes the reopening story. The Dow Jones Industrial Average fell by over 700 points.
“The real question you have to ask yourself is, do I believe the world will get more vaccinations and herd immunity in three months? “Niles stated. “Things will look better three months from now in terms of reopening than they do today. I believe, at least from a perspective, that is what will happen once we get through this winter period.”
“Then there’s the IDFA stuff from Apple, which is affecting advertising dollars and so on, and [Facebook and Google] were up a ton coming in,” said Niles, founder and senior portfolio manager at the Satori Fund. He was referring to an iPhone privacy change implemented by Apple earlier this year.