We’ve gone from Eulogy to Euphoria in less than 100 days.

In March the market was plummeting 5-10% per day, and absolutely nothing was safe. We’ve only turned the monthly calendar 4 times, but it feels like 4 years. The bad news was relentless: Travel companies went bankrupt, airlines called for bailouts, restaurants in every neighborhood shuttered, and 20 million people filed for unemployment. The S&P 500, like a fighter before weigh-in, wasted no time shedding 35% of its weight in 3 weeks.

Then somehow, within 4 months, the bloat is back. Today, the stock market inexplicably sits near an all-time high, while infection rates and prices of electric car company stocks are skyrocketing. We all want to know: What’s going on here?

Trying to piece together why a 30 Trillion dollar stock marketplace is behaving a certain way is difficult. There’s a ton of information and hundreds of unknowns. It’s like putting a copy of War and Peace in a shredder, tossing half the shreds, and asking someone to reconstruct it. As impossible as it seems, we have some clues about what’s going on:

1. The S&P 500 is Made from Concentrate

To understand why the S&P 500 is sniffing all-time highs, it’s important to note that the index is quite lopsided. The 5 biggest companies make up nearly 25% of the index, and they continue to pull most of the weight.

2. A Tale of Two Markets

While Technology and Communications industries make up nearly 36% of the market cap, which swells to more than 60% when you add Consumer Discretionary and Healthcare. These 4 sectors are the biggest gainers from the bottom of the pandemic.

People are right to wonder how Wall Street is seemingly doing so well while Main Street is suffering. The 4 sectors above are more ethereal in nature, and aren’t representative of the whole, struggling economy. If you want to see how the day to day real economy is doing, watch these sectors:

Financial companies (XLF, YTD -22.6%) are reeling as borrowers skip loan payments and odds of foreclosures and loan write-offs grow.

Commercial Real Estate (XLRE, YTD -8.66%) faces an identity crisis. Businesses are reimagining their workforce as the need for cubicles and square footage shrinks. Some businesses are going rent-free and playing eviction chicken; winners will renegotiate terms and losers barrel towards eviction.

Energy companies (XLE, YTD -35%) are taking it from all angles: consumers are driving and flying less, there’s more supply than storage, and clean energy continues to take market share.

3. The Almighty Fed Goes All In

Whether you agree with the actions taken by the Fed, it doesn’t detract from the fact it’s a powerful player. The unlimited bond-buying program coupled with increased money supply has been reassuring for markets. However, one of the consequences is traditionally safe investments like government bonds, CDs, and money markets now pay virtually nothing to the holders. Risk-free is now reward-free, too. All that leads us to the main event:

4. Bubbles Are Forming

That 0% interest rate incentivizes investors to look for something to help their money grow. Usually, rotating from bonds into stable dividend-paying stocks has been the formula of the past. This year appears to be different though: older companies aren’t faring so well (reference the struggling sectors above). Instead, we’re seeing a rotation from safe assets into the riskiest assets- stocks with huge growth potential yet very little in earnings.

Russ Hannemen, the eccentric investor from HBO’s satire “Silicon Valley” said it best:

“It's not about how much you earn. It's about what you're worth. And who's worth the most? Companies that lose money. Pinterest, Snapchat, no revenue. Amazon has lost money for every quarter for the last 20 years and yet Jeff Bezos is the king.”

Today, companies like Shopify, Spotify, Zoom, Tesla, Overstock, and more have been gaining momentum. These companies now trade at prices equal to thousands of times earnings, if they have any, to begin with. The cautious money is turning to the wildest investments, like the sheltered kid from high school who ends up fully embracing the college lifestyle by age 19. It does smell like the dot com bubble of the late 1990s again, where these company stocks are trading on stories rather than meaningful valuations.

Tesla is now the most valuable auto maker in the world by Market Capitalization

This kind of momentum always brings in speculative traders, as they hope to ride the wave up in the short run and get out before the rug gets pulled out from under them. Pop culture is noticing and gamifying the stock market again: since March 2020, the free stock trading app Robinhood is one of the fastest-growing app downloads, Wall Street Bets is one of the fastest-growing Reddit forums, and day trading is being broadcasted by bored sports personalities. Under no circumstance do these people want to hold stocks for more than a few months, which disqualifies them from being an “investor”.

The market certainly holds more surprises in the second half of 2020 (Nobody’s even talking about the election yet!) However, we have seen cycles like this before and are positioning clients as well as we can to take advantage of trends while paying attention to risk/reward balances.

Source: www.finance.yahoo.com as of 6/30/2020

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Sweeney & Michel, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Sweeney & Michel, LLC or performance returns of any Sweeney & Michel, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Sweeney & Michel, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

The Bipolar Stock Markets of 2020