Simon Brown takes a look at why there is such a marked disconnect in the performances of two leading American indices and how the coronavirus pandemic will continue to affect various shares globally and here at home.
Much has been written about the disconnect between Wall Street (the markets) and Main Street (the consumer) as unemployment remains above 10% in the US while markets soar higher, with the Nasdaq hitting new all-time highs recently.
As I have previously written, there are two drivers of this disconnect. The first is that markets look forward 12 to 18 months into the future and, as such, are investing for the second half of 2021. Of course, one can make a solid argument that the economy will then still be under pressure, but likely less than it is now.
This then brings me to the second reason: The US Federal Reserve (Fed). It’s been pumping hundreds of billions of dollars into the system and that money has found a home in the markets, pushing them higher. And, as old-timers in the market always say, never fight the Fed.
There is, however, a second disconnect in markets that also makes sense: that between tech and the rest of the market.
Most indices peaked after the outbreak of the pandemic in early June, while the Nasdaq has continued to move higher, hitting new all-time highs.In the case of the S&P 500, all-time highs came late February, and its post-pandemic high hit on 8 June.
This disconnect makes a lot of sense as the tech-heavy Nasdaq is full of stocks that are actually doing very well during this pandemic, including Microsoft, JD.com and Amazon, which are all seeing significant revenue boosts during the lockdown.
This new revenue is likely to be sticky as people learn new habits, develop new ways of doing things and work differently during lockdown; we are using a lot more tech and we will likely continue using much more of it, even when the pandemic and resultant lockdowns are over.The S&P 500 certainly has some tech exposure, but it is a lot less, and it also includes counters from 'old-school' industries such as leisure, airlines and bricks-and-mortar businesses that are suffering and will continue to suffer under lockdown.
So, the Nasdaq being at all-time highs while the S&P 500 lags makes sense and is likely to continue for a while. As the S&P 500 rebalances, it will get more of these high-flying tech stocks. There have been reports that Tesla will be included, which will see the stock soar even higher. That said, the reality is that the S&P 500 has a number of criteria for listing aside from just market cap, including “positive GAAP profit over a 12-month period”, which would exclude Tesla.
Locally, we’ve seen a similar disconnect between gold miners and the rest, with banks and property remaining under pressure.
But we’re going to see a further disconnect, even within sectors. For example, TFG’s mid-July trading update showed clearly that, compared with Pepkor’s update, the latter is doing better, and this too makes sense. Pepkor generally has lower-priced clothing than the various TFG brands; a consumer under pressure and concerned about the future will be shopping down and will hence be more likely to frequent a Pepkor brand rather than a TFG store.
This trend will also be evident among the food retailers as consumers shop down to cheaper stores, which will benefit brands at the lower end of the price spectrum and will hurt the more upmarket (read expensive) stores. Over the longer term, consumers will start shopping up again, but for the next year or two the trend will certainly be benefitting the lower-cost brands – and as such, their share prices can be expected to outperform.