Uncertainty reigns: The sharemarket is becoming harder to predict

The bear market came and went in a hurry as the pandemic took hold, replaced by a bull market that has looked increasingly fragile.

Stock indexes surpassed their pre-pandemic highs during an eventful third quarter. But they were carried aloft by spectacular gains in a handful of huge technology companies, while returns for the rest of the market were so-so.

Wall Street faces a tricky road ahead.
Wall Street faces a tricky road ahead.Credit:AP

Some portfolio managers and strategists are bypassing the tech giants and looking for opportunities in market segments that have yet to ascend appreciably: smaller companies; so-called value stocks that move in concert with the economic cycle; and foreign countries.

“Some high-flying stocks are likely to get hit, and hit badly,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies. “If you want to get your toes wet, look at the value stocks that have underperformed so far in this cycle, the stocks in the broader index that did not go up as much.”


The decline that began in September seemed both to make perfect sense, given the fraught economic and political backdrop, and to have come out of nowhere. The S&P 500, which rose 8.5 per cent in the third quarter, continually reached new highs during the summer, and so did the tech-heavy Nasdaq Composite Index, but the rally was growing more narrow.

There were several trading days when the indexes showed strong gains while more stocks fell than rose. That can happen because stocks in indexes like the S&P 500 are assigned weightings based on their market values, and if a large stock like Apple or Amazon rises, it can lift the whole index even if many others fall.

One troubling detail, noted by Ron Temple, managing director of Lazard Asset Management, is that the Nasdaq was up more than 20 per cent for the year in late September, but the median stock in the index — the one that did better than half of the index components and worse than the other half — was down 11 per cent.

The broad weakness — and the narrow strength in tech and other growth stocks, the name given to companies that display resilient earnings in a tepid economy — hints at an uncomfortable truth for bulls. For all the talk of a V-shaped economic rebound, many indicators that have snapped back since the plunge remain well below where they started the year.

The unemployment rate, 7.9 per cent in September, is more than twice the level when the year began, and new claims for unemployment insurance continue at 800,000-plus every week, four times the pre-pandemic rate. Add it all up and there are 11 million fewer Americans working than before the pandemic.

The inability of bond yields and other interest rates to climb from historically low levels also reveals scepticism about a sustained recovery, and the Federal Reserve has made clear, through its actions and words, that the economy is in a fragile state. Beyond reducing its main interest rate to 0 per cent and adding about $US3 trillion to its balance sheet this year through purchases of assets that include exchange-traded funds holding high-yield debt, the Fed said in late August that it would allow inflation to run above its 2 per cent target rate for some time before tightening conditions.

If everybody’s pointing at something, it’s pretty hard to make outstanding returns. I’m trying to think of the last time it was easy to make money buying the obvious thing.

Kevin Landis, chief investment officer for Firsthand Funds

“We thought bond yields would be lower for longer,” said Luca Paolini, chief strategist at Pictet Asset Management. “Now they’ll be lower forever.”

That may be an exaggeration, but the uncertain course of the pandemic — displayed this month when the White House announced that President Donald Trump had tested positive for the coronavirus — is one reason for the subdued outlook. Another is dysfunction in Washington.

Discord between congressional Democrats and Republicans has prevented the passage of a follow-up to the multitrillion-dollar stimulus package enacted soon after the pandemic took hold. On Tuesday, Trump ordered White House negotiators to suspend talks with Democrats until after the election, suggesting that no deal would be reached soon, although he seemed to backtrack a bit on Twitter. The Fed has hinted in various statements that it has done much of what it can and that a further fiscal response is needed to support the economy.

The upcoming US election also has investors on edge.
The upcoming US election also has investors on edge. Credit:AP

“From here, the sledding is going to get a lot tougher for a range of reasons,” said Mike Pyle, global chief investment strategist for BlackRock. “A new fiscal stimulus deal is increasingly unlikely until November, and we’re still in a place in the labour market that’s consistent with a very severe recession.”

Goldman Sachs is advising clients not to hold their breath. The investment bank said last month that additional stimulus is unlikely this year and that it was cutting its forecast for fourth-quarter economic growth to a 3 per cent annual rate from 6 per cent.

But with the consensus so clear that growth will remain sluggish, advocates of economically sensitive stocks, known as cyclicals, contend that the discrepancy in returns and valuations between those securities and growth stocks more than accounts for the current economic weakness and a lot of expected weakness in the future.

James Paulsen, chief investment strategist at the Leuthold Group, said cyclicals have a long history of outperforming in the early part of a recovery, and in a note to investors, he made a case that one is approaching.

He highlighted an indicator he had devised that encompasses monetary and fiscal policy tools and may signal emergence from recession with about a one-year lag. The indicator rose sharply in June, to a level higher than in all previous recessions since 1960, suggesting an emergence from recession around June 2021.

“Consequently, the most economically sensitive companies (which comprise the bulk of the broader stock market) may currently be positioned with the greatest upside profit leverage of the postwar era, just ahead of a pending 2021 economic boom,” Paulsen wrote.

Some investors put off by the high prices of the technology giants are looking for smaller tech stocks that are cheaper and have more room to grow.

“If everybody’s pointing at something, it’s pretty hard to make outstanding returns,” said Kevin Landis, chief investment officer for Firsthand Funds, which runs portfolios of publicly and privately traded tech stocks. “I’m trying to think of the last time it was easy to make money buying the obvious thing.”

He has been buying stocks like Roku, a distributor of streaming entertainment that is a less obvious alternative to Netflix and, like Netflix, has had its growth accelerated by the pandemic.

Another portfolio holding that has been helped by the pandemic is Chegg, a provider of online education services and textbooks, which Landis expects to benefit from a new emphasis on “student empowerment.”

“The reinvention of education is in its infancy,” he said. “These people are in front of that.”

Other fund managers are seeking stocks that encompass features of what’s hot and what’s out of fashion. Temple at Lazard, who is one of the lead managers on the Vanguard Windsor II fund, likes companies for which technology is a crucial element but that operate in industries where performance has been subdued, such as energy, financial services and health care.

The New York Times

Market Recap

A concise wrap of the day on the markets, breaking business news and expert opinion delivered to your inbox each afternoon. Sign up for the Herald‘s here and The Age‘s here.

Most Viewed in Business

Source: Thanks smh.com