Here we go, once more? Rising caseloads for the virus, mainly from the highly contagious Delta variant, and mostly among unvaccinated people, helped unsettle stocks last week. But not all stocks. Nicholas Atkeson and Andrew Houghton, principals at Delta Investment Management, in San Francisco, tell us about that:
Larry Light: The coronavirus has a history of doing a number on the stock market.
Nicholas Atkeson: P.T. Barnum said, “There’s no such thing as bad publicity.” Unfortunately, the Delta variant has not been good news for most of the market with the exception of “Covid stocks.”
Covid stocks are very large cap, internet/technology-intensive growth stocks that do well if the economy is open or shut. These stocks include Google-parent Alphabet, Amazon, Netflix, Apple, Microsoft, Facebook, etc. During 2020, the Covid year, the largest 100 stocks of the Nasdaq appreciated by 48.6%.
Light: These names have always been expensive. But lowered interest rates these days—look how the 10-year Treasury note’s yield has slumped—help these stocks.
Andrew Houghton: Investors are discounting earnings from the distant future back to today to justify the high valuations of large-cap tech stocks. When the Delta variant diminishes the worldwide growth outlook, inflation fears subside and so does the 10-year U.S. Treasury yield.
Atkeson: Falling interest rates help the Covid stocks because the discount rate on future earnings is lowered. Slowing growth rates are less of a concern for these stocks as many are at the forefront of mega-growth trends and in some cases, benefit by the stay-at-home Covid economic environment.
Light: For a while this year, the tech leaders flagged, and cyclicals thrived. Then the situation flipped recently.
Houghton: Slowing growth expectations hurt almost all other stocks, especially cyclical stocks. We see this in the travel, restaurant, financials, industrials and energy stocks, to name a few.
Atkeson: While the S&P 500, primarily supported by large-cap technology stocks, reaches new highs, small-cap, value and dividend stocks have trended sideways to down for at least the past month.
Since June 15, there has been a pronounced change of leadership from the Russell 2000 small-cap index to the Nasdaq and from U.S. value stocks to U.S. growth stocks. U.S. energy led the market in the first quarter. Since June 15, the energy sector has been underperforming.
Light: All that said, second quarter earnings seem poised for a dose of good news.
Atkeson: We are at the beginning of earnings season. What happens during this time may determine if the trends emerging since June 15 continue or abate.
Houghton: This past week, Bank of America CEO Brian Moynihan said consumers are spending 20% more this year than they did in 2019. He sees the recovery gaining steam and strong deposit growth.
Light: That’s a case for optimism. With earnings season underway, misses for analysts’ estimates have been rare.
Atkeson: As of Thursday, only two companies missed consensus estimates out of 25 reports. One of those companies was Taiwan Semiconductor, which reported 11.2% year-over-year earnings per share growth and 19.8% revenue growth.
Light: That’s pretty darn good, EPS misses or no. Still, its stock price got punished for that shortfall, dropping 1.5% Friday. But you have to wonder whether the market was overreacting.
Atkeson: The company raised their guidance and reiterated that demand for semiconductors is not cooling off.