Why investors are spooked by the economic rebound
Unpacking this counterintuitive trend
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It sounds counterintuitive, but an increasingly healthy economy is making investors nervous, said Matt Phillips at The New York Times. Though they "had no trouble gliding past the death and economic devastation wrought by the pandemic," the S&P 500 and other major indexes have wobbled in recent weeks despite the vaccine rollout, the prospects of another stimulus bill, and other positive signs of recovery. Instead, "worry that the economic rebound will cause inflation" has spooked investors. The "mere possibility of painful 1970s-style price growth" could cause the Federal Reserve to raise interest rates sooner than expected. That has made bond investors demand higher returns, and has driven doubts about a stock market fueled by low rates.
This pattern isn't unusual, said William Watts at MarketWatch. Last week we saw a drop in technology shares so sharp that #stockmarketcrash was trending on Twitter. But it's likely that what we are seeing is less the sign of a coming market crash than a "rotation away from the market's pandemic-era leaders," mainly tech stocks that benefited from the lockdowns and workers staying home. "Investors appear to be taking profits on those highfliers," such as Tesla, Apple, and Amazon, "and using the proceeds to buy stocks of companies in sectors more sensitive to the economic cycle," such as banks and energy companies. It's instructive that the tech-heavy Nasdaq entered correction territory while the Dow and the S&P 500 have not come close. Value investing, or "identifying cheap companies trading below their true worth," might be making its long-awaited comeback, said Michael Mackenzie and James Fontanella-Khan at the Financial Times. The Warren Buffett approach "has been well beaten over the past decade by fast-growing stocks led by U.S. tech giants." But so-called value stocks "boomed after the internet bubble burst in 2000," and fund managers like John Rogers, the author of the Patient Investor newsletter, believe a similar revival will continue as the economy returns to normal.
The market is saying "sell Tesla, buy Exxon," said James Mackintosh at The Wall Street Journal. Since early February, Tesla is down more than 20 percent and Exxon Mobil up more than 30 percent, "a stunning reversal of the pattern since the start of last year." That doesn't mean that oil is suddenly back. Tesla is a bet on the long term, and Exxon on the short term. Investors had been looking ahead to the long run. Ultralow borrowing costs made it easy for companies to invest in the distant future. Terrible pandemic prospects made the near future look unappealing. Now that's changing. "Cyclical stocks, those most sensitive to short-run economic growth, have been doing well since COVID-19 vaccines raised hopes of economic reopening." That trend accelerated as it became clear the stimulus would pass. "Exxon is what a winner looks like in this new world of stimulus-driven demand. Oil is the most sensitive commodity to global consumption, and everywhere is heading for reopening this year." Even after the big gains for the companies "bombed out" by the pandemic, I think there's still more to go. Investors are looking for profits "in the here and now." But the long term? That still probably belongs to the Teslas, not the Exxons.
This article was first published in the latest issue of The Week magazine. If you want to read more like it, you can try six risk-free issues of the magazine here.