“Bull markets climb a wall of worry.” The old adage proved true again today as the S&P 500 breaks out to new highs.
Investors ended last week fearing higher tariffs against China before the G20 Summit in Osaka. Then President Trump withdrew the threat after meeting with his counterpart, Xi Jinping, and saying trade talks would resume. The worries evaporated and stocks ripped higher.
Before exploring which parts of the market are most exposed to the news, consider how much fear was priced into the market. A Bank of America Merrill Lynch survey on June 18 showed investors had piled into safe-haven bonds at the most aggressive pace since the financial crisis. Morningstar issued a similar report about the iShares 20+ Year Treasury Bond ETF (TLT) last week.
That flight to safety came despite gross domestic product continuing to grow. It came despite jobless claims remaining near 50-year lows. It came despite key manufacturing indexes holding in positive territory and incomes still rising.
Chips & China
This morning it seems like the fears made little sense. So now the big question is, where will all the cash go? Semiconductors are the most important place right off the bat.
Stocks like Nvidia (NVDA), Micron Technology (MU), Advanced Micro Devices (AMD), Western Digital (WDC) are among the most prominent. MU and WDC rallied last week on signs the memory-chip market was stabilizing — even before a China deal.
AMD is the best performer this year (and those fourth-biggest gainer in the S&P 500). It’s benefited from strong results and the rise of cloud-based videogaming, also known as esports.
Chinese companies, especially technology stocks like Alibaba (BABA), are rising. That bullishness could spread throughout emerging markets because in May index-administrator MSCI started a process of doubling the number of Chinese equities in its key benchmarks.
Apple (AAPL) is another huge name because it has a double exposure to China. On one hand, it relies on the country for manufacturing. But even more important, it’s a major untapped growth area for iPhones.
Energy Rallies on Production Cuts
Energy stocks are rising because a halt to the trade war is good for the global economy. The sector is also benefiting from news yesterday that OPEC, Russia, Iran and Iraq agreed to extend production cuts through the end of 2019.
Banks and financial stocks had their own bit of good news last week as the Federal Reserve said the country’s top lenders are healthy enough to increase dividends and buybacks. On top of that, banks may see their profitability improve if interest rates rise because of money fleeing bonds. (This is known as the “yield curve steepening.”)
In conclusion, bear markets often begin with complacency as investors think stocks will never fall. But bull markets can run higher when people are too scared to have all their money in equities. Each little bit they add lifts the market higher. And that’s exactly what seems to be happening now.
