"Buy the rumor, sell the news." Lately, I've been pondering old Wall Street adages like this one to see whether they still hold value for investors in this modern world of "meme stocks," cryptocurrencies and Robinhood trading on mobile apps. Indeed, sometimes, looking at an old saying with fresh eyes can deliver new insights that are oddly relevant to the current investing environment. (See my piece in The Oxford Insight: "Sell in May and Go Away?") Well, something very odd seems to have happened in markets this past week. And investors looking for portfolio growth this year absolutely have to understand what has been going on and react accordingly. But first, consider that S&P 500 Index companies are on track to report their highest quarterly net profit margins since the third quarter of 2018 and their highest first quarter margins in more than a decade. And in April, company analysts increased earnings estimates for the second quarter by 4.2%, the most they've increased estimates by since 2002, according to FactSet. Also, we're clearly heading into an economic boom as the economy reopens and consumers return to malls, restaurants and car dealerships, as well as head out in search of new homes. As a result of all that anticipated economic activity, the U.S. economy will expand 8% this year, Goldman Sachs predicts. The last year that U.S. growth even came close to that was 1984, when the nation recorded GDP growth of 7.2%. In fact, the boom has already begun. Some 770,000 new jobs were created in the U.S. in March, and unemployment claims in April dropped to below 500,000 for the first time since the beginning of the pandemic. Another 226,000 new jobs were added in April, according to Friday's employment report. That April number was below expectations but also threw worries of inflation and Federal Reserve rate hikes out the window, so markets may eventually see it as a positive. Yet as of Thursday morning, the S&P 500 was down nearly 1% for the week and the market was awash in red. Below is a Finviz heat map (one of my favorite market resources) of that index around midday on Tuesday. (The size of the box indicates the company's market cap. The redder the color, the more the stock has fallen. Green means it's gained.) Even small cap stocks were dropping, with the Russell 2000 small cap index down 1.62% early Tuesday afternoon. So there was more than just a rotation out of mega-tech and "COVID-19 winner" stocks happening. Clearly, that vast sea of red is not justified by the overwhelmingly positive news on corporate earnings and economic growth. So Why All the Red? There were various explanations flying around for this week's sell-off in markets. A few of the more popular theories included growing fears of inflation, rising tensions between China and Taiwan, comments by Treasury Secretary Janet Yellen about interest rates, and, interestingly, news that carmaker Ferrari (NYSE: RACE) doesn't expect to hit its 2022 sales goals until 2023. That latter news nugget might suggest that other manufacturers may also disappoint investors. The wildly varying nature of those reasons (economic, geopolitical, policy-related and company-based) suggests that, well, nobody really knows why the market was hemorrhaging red this past week. And most commentators or journalists who offer an explanation for the drop are just guessing. (And if you listen to anyone who tries to tell you they can predict such things, I have a bridge to sell you.) One market commentator offered a circular explanation for the market drop that left my head spinning. "Investors could be getting increasingly disappointed that stocks are not doing well in the face of fantastic earnings news," James Paulsen, chief investment strategist at The Leuthold Group, told CNBC. Wait a second. Aren't "investors" the ones who drive stocks up and down? So they were disappointed in their own reaction to earnings news and bid stocks down? While you ponder those questions, tell me which came first, the chicken or the egg... When you see reasoning like that, just hit delete and move on. Rumors and News What I think is actually happening in the market is that when Pfizer (NYSE: PFE) and BioNTech (Nasdaq: BNTX) announced their COVID-19 vaccine was 90% effective on November 9 (Vaccine Day), markets were shaken out of a two-month lull (the S&P 500 had dropped more than 7.2% from the beginning of September through the end of October). From Vaccine Day until the end of April, the S&P 500 rose almost 18%. That's despite the fact that the coronavirus was still raging in North America for much of that time and the economy was still foundering. Essentially, investors were buying on the "rumor" that the pandemic was coming to an end and the economy and corporate sector were going to rally. Now the rumors have come true and turned into news. (See the data above on the economy, labor market and first quarter earnings.) And investors are now selling on the news. It's a time-tested trading strategy. Buy an asset on speculation (rumor) about what will happen. Once the expected event occurs, sell into a market full of eager new buyers and take profits. In addition, because markets look six to 12 months ahead, many investors already consider the end of the pandemic and the economic boom to be old news. And they want to know what the next catalyst will be that will drive stocks higher. The takeaway? Don't wait for the rumor to become news before you invest. If you do, you'll be buying at the price after the market has baked in every last drop of information. And that's where our strategists come in. Their research is always forward-looking, with the goal of anticipating what will happen in the future so that you can invest now while prices are still favorable. In fact, Chief Trends Strategist Matthew Carr is now predicting a major event that could occur as soon as this summer, sending the stocks in one particular sector soaring. Click here to find out what he's talking about... and perhaps buy on the rumor before it turns to news. Enjoy your weekend and stay safe, Matt | 
No comments:
Post a Comment