foxex: Bloody, But Unbowed

Chart Advisor | Focus on the Price

Wednesday, March 04, 2020

1. Are investors panicked or just nimble?

2. The string the Fed is pushing

3. The sector still in the green

Market Moves

Bond yields continued their relentless trudge lower as gold prices held on to yesterday's rebound and stock prices rose four percent above yesterday's close. Investors are working overtime to make sense of it all, and surprisingly, are not really panicking despite the recent market correction. Could it be that investors are becoming better informed and are able to respond more nimbly to potential threats in the market? Could it be that they have become, as the poet William Henley might have said, the captain of their own investing soul? The chart below provides subtle evidence to support that notion.

The Russell 3000 index is a collection of the majority of liquid-trading stocks. It is divided into two smaller indexes, the Russell 1000 (the largest capitalized third of this collection), and the Russell 2000 (the small-cap index which makes up the rest). In this chart several indexes are compared using iShares ETFs including the following: Russell 3000 (IWV), Russell 1000 (IWB), Russell 2000 (IWM), Russell Microcap (IWC), Russell 1000 Value (IWD), and Russell 1000 Growth (IWF), along with State Street's S&P 500 index ETF (SPY).

What this chart shows is that IWF, the growth ETF, has outperformed IWD, the value ETF, since the beginning of the year, and also since the recent low of the correction. The growth fund is also outperforming the S&P 500 benchmark. This implies that investors are rushing in to buy bargains, sensing an opportunity. This isn't what you'd expect from scared investors. Time will tell whether these investors should be more scared than they are, but for now the level of confidence they are displaying is unusual and may imply more bullish moves for the market in the days ahead.

The String the Fed is Pushing

The Fed's surprise rate cut yesterday was designed to add available money into the economy. Some critics insist that such policies are ineffectual and compare a central bank's efforts to support an economy this way to the effect of pushing on a string. It doesn't seem likely to work unless consumer demand is giving a healthy tug on the other end of that string.

But it's hard to argue against the results of the last decade, which have seen the U.S. economy and stock market become the desire of all other developed nations. With this in mind, it is notable that at least one chart suggests the Fed's recent salvo has landed its target. Consider the following comparison between iShares Residential Real Estate ETF (REZ) and the U.S. 10-year Treasury Note Index (TNX). This chart shows that today's action following the Fed's announcement has pushed the residential real-estate investment industry above the 50 percent retracement level, a bullish indicator for the future. The trickle-down effect from money going into this sector is precisely what the Fed hopes to see counteracting the impact of Coronavirus fears.

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The Sector Still in the Green

During times when market fears and declining interest rates coincide, one predictable outcome that should occur is that Utility sector stocks should thrive. In general they seem to have done just that with the sector outperforming all other sectors so far in 2020. But performance has been uneven when considering the individual stocks within the sector.

The chart below compares four of the top utility company stocks including Nextera (NEE), Southern Company (SO), Duke Energy (DUK), and Consolidated Edison (ED). It is worth pointing out that NEE shares are outperforming the others, and the company's focus on renewable energy (combined with the ESG mandates of many investing funds), has been an important factor in that.

The Bottom Line

As bond prices continued higher and yields lower, stocks rose significantly and gold prices didn't falter. Investors seem to be taking the opportunity to pick their preferred strategies and with more options than ever in the market, they can easily do so. Utility stocks that focus on ESG factors seem to be holding on to nice performance in 2020 so far.