A Funny Thing Happened on the Way to the Debate

A Funny Thing Happened on the Way to the Debate

by Zach Marsh on Oct 2, 2020

It’s been said that in times of difficulty we should take it easy on ourselves. This week I did just that. I didn’t go over the top, like, say, indulging in a hot fudge sundae. But nevertheless it felt good to look after myself, and my mental well-being. What did I do? I didn’t watch the debate. I don’t think I missed anything. As much as we make declarations about the completely unpredictable nature of 2020, this debate had all the drama of a Formula 1 race, you already know what the result will be, you just want to see if there’s going to be a crash. But even then, the crashes in this political race are pretty predictable. If you watched it you’ve got a stronger constitution than me, even if I think you are a glutton for punishment.

While the debate offered little in the way of surprises, what did come somewhat as a surprise is that, while Biden may have brought up the coronavirus repeatedly in the debate, it was Trump who actually brought the coronavirus. Yet, when I saw the news this morning I just had to shrug. Even that news, somehow, was not really surprising. If my biggest complaint against reality tv is that it seems so scripted, now that our entire world is one big reality tv show it all feels scripted.

The stock market reacted to the news by retreating from its previous day’s rally. Overnight futures sold off when news broke about Trump’s positive test. And while it’s hard to argue that the market’s initial reaction was not directly tied to the test revelation, I remain skeptical that the impact on the market lasted much past the 8:30 opening bell. It is easy to see various ways this may influence the election, but so many of those various ways represent conflicting outcomes. In general, the market responds to news that it doesn’t know what to do with by selling first and asking questions later. This morning was no different. But as the day went on the market began to tell a different tale.

A fight that’s been brewing underneath the market has been the fight between small cap and big tech and value stocks vs growth stocks. As I’ve highlighted recently, if this fight was a boxing match, it has been a completely one-sided affair. The performance of technology stocks since the pandemic hit has been phenomenal, while the returns of the small cap index and the large cap value index has been flagging. In a world devoid of yield, growth becomes king. As borrowing costs approach zero it seems that the price for future growth becomes absurd. To this end, investors have been willing to pay any price for tech shares and the earnings multiples on many of these companies have partied like it’s 1999. And the relative value of the Nasdaq 100 vs the Russell 2000 has also reached levels not seen since the internet was called the World Wide Web.

Today, however, the storyline changed. While the Nasdaq spent the day getting clubbed, the small cap and value stocks held firm. Led by banks and energy, two of the worst performing sectors year-to-date, the Russell 2000 managed a gain of 0.5% vs the Nasdaq’s loss of over 2.81%. A few times over the past few months this spread has broken just like today. July, August, and September all witnessed brief and moderate shifts from tech to small cap and from growth to value. Each of these periods ended up being short-lived, and tech went back on the attack.

Technology shares have been viewed as being impervious to the virus, even more so, a beneficiary of the virus. Which, in light of the Trump’s positive test, would seem to make today’s market reaction surprising. Rather than choosing to continue to benefit virus-proof stocks, the market chose today to migrate to the beaten down sectors. This again furthers my belief that even if you gave me tomorrow’s news today, I still would only beat the market half the time. And that’s if I’m lucky.      

For the week, stocks still ended positive with the S&P 500 rallying 2.3%. Gold rebounded this week finishing up 2.15%. Treasury bonds were lower, with the 10 Year US bond down 0.33%.

Thanks for reading,

Zach and Dave  






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