July 10, 2020 - A glance at the major indices tells most of the story about what worked this week.
The Dow Jones Industrial Average posted a modest gain, while the NASDAQ soared to new highs. The more diversified S&P 500 had a solid, but not spectular gain.
The relative performance of those three indices should be a hint about what parts of the market are doing well and what is struggling. Since the S&P 500 peaked on June 8, we've returned to the trading that characterized the early part of the recovery, namely, five massive stocks leading the market higher, while huge swaths of the market struggle.
Those five companies, Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Facebook (FB) and Alphabet (GOOG, GOOGL) now make up nearly 25% of the S&P 500. These stocks have helped propel the NASDAQ to new highs. Over in the Dow meanwhile, Apple and Microsoft (combined weight about 16%) have helped that index recover, but big-name retail and financial services stocks have kept the rally in check.
Looking at our list of sectors, Communications Services was the big winner. This is where Facebook and Alphabet live. Biotechnology was the next best performer as stocks researching vaccines and other potential coronavirus treatments continue to do well. Technology also had a good week.
Somewhat counter to the trend, consumer staples was the third-best performing industry this week, but that is likely due to a monster week from Walmart (WMT) after the company announced plans to launch a subscription service to rival Amazon Prime.
If the good news is in technology and communication services, the bad news is in the parts of the market that need a growing economy with a lot of people and goods moving around. Energy and industrials were the two weakest sectors this week. This is oil companies, cruise ships and airlines, among other groups that are all somewhere between a total halt of their business and deeply depressed demand.
There is one other place where investors are finding some excitement. That area, somewhat counterintuitively perhaps, is electric cars. Tesla (TSLA) rose nearly 27% this week after a big jump last week, both seemingly on no news. Meanwhile, Spartan Energy (SPAQ) gained almost 54% this week on rumors it may merge with electric-car maker Fiskars. We would be remiss if we didn't mention electric car companies that were darlings as recently as a week or two ago, Nikola Motors (NKLA), Workhorse (WKHS), which like Fiskars, have yet to actually deliver a sellable car, were down big this week. However, both have still nearly quadrupled in price in 2020.
These massive short-term moves don't make any sense in light of a global pandemic that is both keeping a lot of people at home and threatening to slow the U.S. and possibly the world economy drastically from where they were at the beginning of the year. The moves in all four of these companies seem unsustainable, but how long these valuations can last is anyone's guess.
Pot stocks, many of them with no real business, soared to incredible heights before crashing in 2018. These sorts of bubbles emerge periodically, and so far, the end is always the same. We don't know how high the market for electric car stocks can go, but we do know it can't go up forever.
Earnings season begins next week, which should be interesting for reasons we discussed in our Monday post.
All told this week, the S&P 500 gained 1.76%, the Nasdaq added 4.01% and the Dow Jones rose 0.96%.
