The markets rarely offer a clear and full explanation of what they’re up to, nor do they owe us one. Even so, the messages being sent by recent action is particularly staticky, conveying mixed signals about investor risk appetites and where the economy and markets are in their cycles. In the 17% run off the mid-June low in the S & P 500 and this past week’s slight pullback, leadership has come from a counterintuitive combination of utility stocks (traditionally defensive) and industrials (classically cyclical) and Apple (stable behemoth growth stock, somehow both beloved and underrated). Eclectic equity leadership The utilities sector is the only one to make a new record high in the recent rally, delivering a 10% total return in a year when the S & P 500 is down by the same amount. The Utilities Sector SPDR ETF (XLU) is even outperforming the S & P 500 since the market low on June 16, an unusual feat for a defensive group – one that shines late in an economic cycle – during a risk-revival rally that by some lights resembles a new bull market. Yet industrials have also perked up, now ahead of the broad market year to date, with technical analysts extolling the improving trend, in what would normally look like a textbook early-cycle indicator of a new market and economic uptrend. There is some rationalization of this apparent paradox, with surging natural gas prices helping many utilities’ pricing power, but mostly there is consternation. Apple, a sector of one And then there’s Apple, not so much a creature of the economic cycle as a beast of wealth creation that threatens to consume ever-larger expanses of the S & P 500. The stock is off just over 3% this year and is about 6% off its all-time high. It’s also at a record level relative to the Nasdaq 100 and has added nearly $700 billion in market value since the June 16 bottom. Apple, at close to 27-times next 12 months’ forecast earnings, hasn’t been this expensive versus the S & P 500 in a dozen years. The stock, with its $2.75 trillion market value, now has a 7.4% weighting in the S & P 500, the highest of any stock in decades. This makes it larger than the energy and materials sectors combined, and nearly as large as the industrials’ 7.9% weighting. The S & P 500 industrials sector has 71 companies which employ more than 4 million people and will collect some $1.6 trillion in revenue this year. The sector in aggregate trades in line with the S & P 500 just over 18-times forward earnings. Apple is, of course, a single company with 154,000 employees, set to post $400 billion in revenue this year. What does the remarkable momentum and lavish capitalization of Apple tell us about investor priorities and macro expectations? It’s not easy to say. It’s not excitement over growth: the company forecast to have revenue and earnings growth of 4% and 6% in fiscal 2023 (which begins in six weeks). Yes, there is a perception of safety and financial quality in the name, but many comparably sturdy stocks aren’t doing much. It’s also not the case – as it has sometimes been in years past – that a powerful outperformance phase for Apple is happening at a time when the broader tape has been weak. In fact, the burst from the lows registered several fairly rare “breadth thrust” signals, such as an overwhelming percentage of stocks shooting above 20- and 50-day average prices, which form the key basis for the unproven but plausible case that a fresh bull market is underway. The equal-weight S & P 500 is still beating the market-cap-weighted benchmark this year by three percentage points, despite Apple’s strenuous efforts. No, Apple’s tenacious run simply underscores its singular status, a sector and almost a whole “style factor” in itself, the stock investors treat as ballast in tough markets and the biggest sail when the winds turn favorable. The stock is in nearly 400 ETFs and is a 10%-plus position in dozens of tech, growth and ESG portfolios. Yet arguably, it is still under owned by institutions given its hefty index weight and Berkshire Hathaway’s 5.7% stake. For all its other attributes, Apple is also a streaky stock, not a trusty bellwether of either the rest of the market or the economy. Yet even here, it’s on a heady run, up 30% over the past two months for the 11 th time since 2001, according to Bespoke Investment Group. Somewhat surprisingly, after prior two-month rallies of this magnitude, the stock continued to perform well afterward, with a negative return only once in the ensuing six months (in 2008), calculates Bespoke. Navigating opposing currents Given those characteristics, Apple’s next decisive move will have an outsized effect on the tape but won’t say much about a cycle that doesn’t neatly conform to many historical cadences. Meantime the bond market is pricing in another full percentage point of Federal Reserve interest rate increases in coming months followed rather quickly by a possible cut, running counter to the consistent (if obligatory) insistence of Fed officials that no such turnabout is likely. The market seems to like this hypothetical path, embracing the notion of a so-called dovish pivot even though historically such a shift to easing has not been kind to stocks. Initiating an easing cycle has usually meant the Fed went too far and the economy was suffering (though the vaunted 1994-1995 “soft landing” was a shining exception). Even from the start, the compressed nature of the cycle, extreme levels of stimulus, spring-loaded supply and demand shocks due to the pandemic and reopening and heady asset valuations have upended many typical market and economic interactions. Remember early this year when Wall Street busily informed us that stocks tend to keep rising for several months after the Fed starts raising rates? The market collapsed two months before the first hike and then kept falling. And if time-seasoned patterns are being challenged, how do we read the fact that the S & P 500 regained more than half its total bear-market losses at last week’s high? The market has never, since 1950, rolled over to a new low after falling more than 20% and then recapturing more than half the decline on a closing basis. It’s a positive sign, if nothing else, for sure. And so far, the pullback appears perfectly routine. Another plus: The level of skepticism evident among investment professionals that the market upswing is trustworthy. Yet as 2022 is proving, there are no unequivocal messages from markets, and no guarantees for investors.
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