(Please enjoy this updated version of my weekly commentary published March 25th, 2022 from the POWR Stocks Under $10 newsletter).
First, let’s review the past week…
Over this past week, the S&P 500 is up by 2.5%. Overall, we are now up 8.3% from last Monday’s low.
And, the gains are even bigger for certain parts of the market. Here’s a sampling:
Nasdaq up 12.8%
ARKK up 25.9%
SLX (steel ETF) up 16%
Oil up 17%
So, this rally is clearly a combination of leadership continuing from energy and materials plus an added OOMPH from the participation of oversold, growth stocks which have been mired in a bear market for the past year.
One remarkable aspect of the rally in growth stocks is that it’s taken place despite short-term yields continuing to grind higher, the Fed implementing its first rate hike, Powell signaling that a 50 basis point hike is likely, and continued strength in commodities which implies a more hawkish Fed.
(The impetus for the correction in growth stocks was the Fed getting more hawkish due to inflation and improvements in the labor market. So, it’s interesting to note that growth stocks sold off as the odds of a Fed rate hike increased but are now having a rally as the Fed actually begins raising rates.)
In terms of the broad market, I continue to see this as being a range-bound market with the S&P 500 being about 100 points away from the top-end of the range.
Will the market simply rollover at the upper-end or has something more structurally shifted which is being sniffed out by the market’s relentless buying. It is worth noting that such bullish price action and “relentless buying” have marked important inflection points in the market in the past like in March 2020.
A week ago, I would have thought it’d be absurd that we’d be seriously thinking about this a week later. But, now, it’s not absurd at all.
In terms of our strategy, we did slightly reduce exposure. As of now, the gameplan is to again slightly reduce exposure and take some profits if we challenge the upper-end of the range.
Now, let’s shift gears a bit…
I’ve used these commentaries to share thoughts and ideas that over time morph into trades. Examples include energy, travel, and housing. Last week, we talked about gold and housing as being 2 trends to watch.
Today, I want to share some thoughts on 1 more trend that isn’t as relevant in the near-term but could matter in the longer-term. And, I don’t have a cohesive thesis yet but feel these are interesting stories to watch that could yield opportunities if things unfold in a certain way.
Loans + Auto Prices
Over the past 2 years, we’ve seen so many extraordinary things in terms of the market rallying more than a 100%, parabolic moves in growth stocks with gains of 3-10x in many names between March 2020 and February 2021, and then a brutal bear market where the bulk of these gains were unwound.
We have seen a similar parabolic move in autos as demand has increased due to the strong economy, while new car production has been reduced due to supply chain issues.
The result is a parabolic move higher in used car prices.
Will this sustain or will we see some reversion-to-the-mean like we have for so many assets.
My belief is that the capitalism machine is not broken. Automakers and supply chain participants will adjust and ramp up supply to take advantage of the elevated prices in the market. Yes, this process may take a couple of years and the recovery was adversely affected by lockdowns in Asia.
Auto stocks and auto parts stocks are quite cheap in addition to having this earnings tailwind over the next couple of years.
Another impact of a drop in used car prices is something that I think could be a big deal for a small percent of people and part of the economy but probably not large enough to affect the entire economy.
I’m thinking about auto loans.
So many used cars are bought with financing. Buyers, today, are paying a higher than normal price which could quickly be down 20 to 30% in less than a year if the market reaches a healthier equilibrium.
Financial conditions have gotten tighter with the Fed’s rate hike and climb in Treasury yields. Higher costs are eroding discretionary spending and likely putting pressure on low-margin businesses.
While the economy is doing well on an aggregate basis, it’s likely that certain pockets of people and businesses are feeling immense pain. And many of these loans will go bust.
To be frank, I’m not even sure about the best way to take advantage of this development. One takeaway is to reduce exposure to companies with high amounts of auto loan debt. Another is that this probably isn’t the best time to buy a car.
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SPY shares were trading at $451.36 per share on Friday afternoon, up $0.87 (+0.19%). Year-to-date, SPY has declined -4.67%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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