The broad U.S. stock indices remain close to their all-time highs. However, those indices are constructed in a way that heavily over-emphasizes the largest listed companies. A different way of looking at U.S. stocks takes the average stock performance irrespective of a company’s size – and by that measure, stocks today stand almost exactly where there were back in mid-May. And of course, if the “average” is flat, it conceals many stocks that have experienced significant corrections, and some industries that have experienced full-fledged bear markets. The broad market’s current swoon is thus not much of an anomaly compared to the rest of the last six months. Perhaps it’s just that seasonal concerns are now colliding with slowing macroeconomic data, political turmoil on Capitol Hill, ongoing supply chain issues, more visible and less “transitory” inflation, and the prospect of more hawkish behavior from the Federal Reserve.
A last and significant worry may surround the coming earnings season. The post-pandemic growth snapback peaked some time ago, but analysts’ expectations may still be reflecting a world of snapback growth, so disappointments may be in store. The consumer is exiting the sugar high of pandemic transfers, and so companies may be challenged in passing on their own rising costs to their customers, hurting margins. We’ll see how the numbers look and how managements talk.
All of these worries are finally penetrating public and media awareness, but they have been circulating in the market’s nervous system for most of the past two quarters.
We think this spells “opportunity” as we look toward year-end. The bigger picture is that policymakers remain historically accommodative. They show no evidence that they have ceased defending asset prices and liquid markets as one of their top priorities. The market is moving allocations around as investors large and small hunt for bargains and try to discern what sectors and industries are on the cusp of experiencing a new rise in economic prominence. Inflation and infrastructure talk have put real assets on the heat map again, especially many energy and materials-related stocks — particularly those associated with digitization and decarbonization, including lithium and rare earths. Technological themes remain front and center in investors’ minds, as we believe they will continue to do no matter what rotations in sentiment occur.
Thanks for listening; we welcome your calls and questions.
