A confused and relatively quiet week for Wall Street closes with subtle signs of a much more straightforward market mood emerging. While we may not reap instant rewards here, the longer view looks a whole lot healthier now.
In the last few days we've seen a classic rotation into stocks that lagged the rest of the market. Massive, strong companies like Apple (AAPL: $223, up 5% this week), Alphabet (GOOG: $1,234, up 2%), Berkshire Hathaway (BRK-B: $211, up 3%) and Johnson & Johnson (JNJ: $130, up 2%) are still down over the last 12 months and in many cases have been a drag on the S&P 500's 20% YTD rally.
Over and over this week, we see these battered and neglected stocks rallying now. There's no economic theme at work here. Technology is doing as well as Energy and the big Banks. Investors are now looking for the strong fundamentals they actively shunned over the trade-obsessed summer. They're not crowding into safe havens. They're grabbing bargains.
That's good news for BMR recommendations as diverse as Dropbox (DBX: $20, up 6%), TPI Composites (TPIC: $17.88, up 5%), Salesforce.com (CRM: $155, up 2%), Office Properties (OPI: $31, up 8%), Vornado (VNO: $64, up 2%), Splunk (SPLK: $114, up 3%) and our sector-weight ETFs US Energy (IYE: $33, up 3%) and Financial Select Sector (XLF: $28, up 3%). This is the kind of broad-based buying that can spread throughout our universe, lifting whole portfolios starting with the worst recent performers and rotating back up.
But while this is welcome to BMR subscribers who've been patient with many of these stocks, it's also a reminder that the market truly does move fast to correct its mistakes . . . and it's a warning that if you've been looking to buy the dip, the bottom may be in sight.
After all, the market mood is changing fast. Last week was all about foreign money crowding into the Treasury bond market while domestic bond investors embraced dividend-paying stocks in order to capture a reasonable return. Real Estate, Big Pharma and Utilities led the market forward. While we were happy with so many of our stocks heating up, the move was widely misinterpreted as a defensive flight to safety in the face of a slowing economy. If that were the case, we would have seen more U.S. funds shifting to the ultimate haven of bonds and gold, but that didn't actually happen. Gold weakened last week and is only bouncing a little now.
Instead, this looks more like the early stages of a larger strategic rotation out of bonds into stocks. After all, the economy remains relatively robust and with interest rates trending lower there's more incentive to reach for the higher returns that classically only stocks can provide. Treasury debt pays less than 2% a year now on all but the longest-term bonds and according to the latest inflation indicator there's a good chance that anyone buying these yields will end up losing purchasing power when they mature. That's not attractive at all when the S&P 500 pays comparable (or better) dividends with real upside potential as well.
Needless to say, bond investors aren't going to go straight to our most Aggressive recommendations. They were already cautious and remain deliberate and risk averse, which means they moved first into the steadiest sectors. Now they're looking farther afield for depressed multiples and strong cash flow, bona fide "babies" the market threw out with the bathwater.
When these stocks have recovered their equilibrium, more speculative stories will once again get a chance to take the lead. It's how a healthy market works. We're delighted to see it playing out now.