12: 16 p.m. Stocks are slumping Tuesday as investors wait to see what the Federal Reserve will say at the end of its two-day meeting tomorrow.
It’s a complete reversal of the past two weeks, when the cyclically heavy Dow was leading stocks higher and the growthier Nasdaq was bringing up the rear. And with the Dow up 48% off its 2020 low, the pullback could just be a needed break after such a massive rally.
Or maybe it’s something worse. In a Friday note with the ominous title “Are We Getting Bubblicious,” Citigroup strategist Tobias Levkovich notes that he’s starting to get questions about whether a stock market bubble has been created by investors chasing performance, just as they did in 1999. The firms’s Panic/Euphoria index, too, is at levels not seen since 2002. And that should be a warning sign for investors. “[We] are concerned that such thoughts have been sidelined by the pressure to partake or be left behind,” Levkovich writes.
Nor is the market being driven by fundamentals, and in that way resembles the selloff in February and March. “Back in late February, redemptions started a pattern of forced selling and chartists saw support levels fall away, generating even more downside,” he writes. “Currently, upward price momentum is taking out resistance and compelling shorts to cover. People are ignoring joblessness, trade friction, social unrest, and risks that loom including possible Covid-19 reinfections, the end of bonus supplemental unemployment checks and the upcoming elections.”
That’s a view that sounds more reasonable now than it did 50% ago. But it also pays to remember a lot can go well, too. And it’s just as possible that the market is doing what markets always do, says Société Générale’s Alain Bokobza. “Markets tend to be keen and quick to price-in worst-case scenarios when bad news occurs, and then take time to climb the wall of worries, which makes for a bull market,” he writes. “In the second half of this year, we expect markets to continue pricing in a combination of falling virus cases, rising PMIs, and continuing fiscal injections—this time with no early austerity—while central banks buy the equivalent of new issuance (and probably more) for longer. And, if the Fed is reluctant to go to negative rates, will it prefer to buy equity ETFs to facilitate balance-sheet repair instead, in case another market rout were to develop?”
After such a big drop and an equally big gain, don’t be surprised if the two battle it out in the days to come. What the Fed, which will issue its monetary policy statement at 2 p.m. on Wednesday, decides to do will almost certainly impact the conversation.
Today, however, stocks that looked set to benefit before the recent cyclical rally are the only ones rising.
(DXCM) has gained 4.1% as Cowen raised its price target of the glucose manufacturer to $430 from $360. DexCom is up 76% in 2020.
(AMZN) has risen 2.6% to $2,589.63 after Wells Fargo raised its target on the stock to $3,000 from $2,725. Amazon stock is up 40% this year.
Cyclical stocks, meanwhile, are getting crushed.
(AAL) has dropped 11% today, and is down 37% in 2020 after the International Air Transport Association said 2019 will be the worst year in aviation history. Nordstrom (JWN) has fallen 10% as retailers also fall. Nordstrom stock is off 48% this year.
Write to Ben Levisohn at Ben.Levisohn@barrons.com