What kind of manifestation is this?

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Good day. Yesterday we said that there could be reasons to invest in Chinese stocks, if the Chinese government used its fiscal muscle to revive the economy. Barely an hour after our letter was published, Xi Jinping and his team announced that there will indeed be fiscal stimulus. Chinese stock indices jumped on the news. We are still not convinced. Few difficult targets or policies were announced and much fiscal support will be needed to avoid a deflationary trap. Will China put its money where its mouth is? Send us an email: robert.armstrong@ft.com and Aiden.reiter@ft.com.

A bit strange rally

The S&P 500 hit another all-time high yesterday. The market has been rising steadily, if not spectacularly, since September 6th. That was the day of the August employment day. report. That report explains to a large extent, although not entirely, the dynamism of the market. The report wasn’t terrible; The unemployment rate fell compared to the previous month. But it was weak enough to open the door to the gigantic 50 basis point cut that followed on September 18. This is, at first glance, a soft landing rally.

The market has not only risen in the last three weeks. Its structure has completely changed. The sectors that led the market during the three months before the jobs report are now the laggards. During the summer, investments in falling interest rates (real estate, financials and utilities) and defenses (consumer staples and healthcare) were the place to be. Technology was left behind. This month the opposite has happened. Technology is back with a vengeance and cyclical stocks (materials and industrials) are also booming. The only constant between the two periods was the poor profitability of energy companies, as weak global demand has kept the price of oil low.

In the graph below, the light blue lines show the sector’s performance over the past three weeks, while the dark blue lines show the performance over the previous three months:

In terms of valuation and size factors, growth has decisively outperformed value lately, while large versus small has been a bit of a back and forth, with large caps now leading the way.

If someone had told you a few months ago that the economy would cool only gently and inflation would virtually subside, allowing the Federal Reserve to begin the cutting cycle in earnest, was this the pattern of sector performance you would have predicted? Unhedged must admit, with shame, that we saw little of this coming. The good performance of cyclical values ​​has surprised us: This seems like a soft landing, but cyclicals are supposed to work on a recovery, which is something quite different. And, like many others, we would have hoped that a soft landing would have resulted in a broader market, with gains coming from more stocks across the index. But we’re back to where we were before this summer: Big tech companies bring in most of the market’s profits.

Looking a little closer at what has worked recently helps solve these puzzles. And what has performed best are the Magnificent 7 tech stocks, semiconductors and copper:

The Mag 7 may be doing well for reasons that have little to do with inflation and rates. There has been several news stories recently suggesting that AI investment continues to gain ground, most notably the announcement of a $30 billion AI investment. infrastructure association between Microsoft and BlackRock, with the backing of Nvidia. Now, one might ask: what will be the return on all this investment? But the stock market doesn’t ask this, at least not until now.

The result is that, in dollar terms, the Magnificent 7 tech stocks account for more than half of the S&P 500’s gains over the past three weeks. And in percentage terms, Nvidia, Microsoft, Meta, Tesla, Amazon and Alphabet have outperformed the market. Only Apple (one defensive stockat least for now) has fallen behind.

To some extent, semiconductor stocks (not just Nvidia, but also Broadcom, AMD, Applied Materials, etc.) have sailed after the Mag 7. Micron, which makes memory chips, reported excellent earnings yesterday, with sales of centers of data to the head.

Copper has also ridden the wave. If you believe US demand will rebound after a soft landing, or that industrial investments, whether coming from green energy or the rise of artificial intelligence, are just around the corner, you’ve been looking for a reason to own copper, a fundamental mineral both in processing centers and in markets. solar cells. As Unhedged has done writtenThe copper futures market does not perfectly reflect its long-term prospects, so buying spot copper and copper producers when they are cheap, as they were this summer, is one way to gain exposure.

Copper also just got a second boost thanks to China’s promise of economic intervention. It rose another 4 percent after the Politburo announced its intention to increase fiscal stimulus on Thursday. But Ed Morse of Hartree Partners warns that this response to the announcement and the prospect of a soft landing is basically speculative:

To date there is no evidence that any of the measures adopted by China’s central government will materialize. . .[and]US GDP growth is quite subject to controversy and interpretation. [Buying copper] It’s a matter of wait and see, with downside risk rather than upside.

Morse is absolutely right. Economic data, while strong in the United States, does not suggest a further acceleration in response to the prospect of lower rates, at least not yet. Earnings reports from recent weeks also show a rather mixed picture. While homebuilder Lennar had a great quarter, FedEx had a terrible performance as domestic shipments in the United States declined. Darden, owner of Olive Garden and LongHorn Steakhouse, was a mixed bag. Value-conscious consumers seem to have stayed home rather than enjoying breadsticks at Olive Garden, but wealthier ones devoured chops at LongHorn. Retail giant Costco and pet supplier Petco also had mixed results, with very modest revenue growth. Therefore, it makes sense that technology, which is less closely tied to the consumer economy, leads the market. We’re not so sure what’s driving the rally in cyclicals, other than somewhat lower interest payments.

a good read

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