Monday Market Recap: September 14, 2020
Market Recap
Highlights
9 companies out of 170 have advanced to Phase 3 of clinical human trials for Coronavirus Vaccine including Astra Zeneca, Pfizer, and Moderna.
Blank Check SPAC’s have rocketed to a high of 94 blank check companies this year compared to less than 40 over the previous 5 years.
Jerome Powell indicates interest rates will remain low or at near zero for the next several years, extending market rally .
With the recovery showing some signs of stalling in certain areas of the economy, the U.S. stock market’s rally took a breather. Pushed by momentum chasing and excessive froth in measures of sentiment and the options market, U.S. stocks’ climb to new highs reversed course at the beginning of the month. The Information Technology sector was hit hard as investors rotated out of growth and back into more downtrodden sectors from the beginning of the coronavirus such as utility and value companies.
Much of the risk leading up to the recent selling pressure was related to over concentration. As you can see in the chart below, the largest five stocks in the S&P 500 Index recently accounted for nearly 25% of market capitalization, while for the Nasdaq Composite it is a much more staggering 38%. Compared to the tech bubble that formed in the late 1990s, the largest companies now have more solid fundamentals. However, the risk associated with their dominance is that any rotation out of them—like we saw earlier this month—could lead to a more amplified downturn in the broader market.
August saw the S&P 500 and Nasdaq 100 (which is a basket of the 100 largest, most actively traded non-financial stocks in the overall Nasdaq) hit a number of new all-time highs, while volatility was simultaneously rising. While restaurants and other small businesses struggle to navigate reopening and hiring back employees, the pace of job growth has slowed alongside it. Despite a falling unemployment rate, the increase in permanent job losses doesn’t bode well for the labor market—especially if continuing jobless claims remain elevated and the pace of economic growth moderates as we emerge from the immediate aftermath of the shutdown.
This graph depicts the top 5 stocks % weight by market cap for the S&P 500 and NASDAQ
Source: Charles Schwab
What I’m Reading - The Culture Code by Daniel Coyle
We all know that company culture is important, but in The Culture Code, Daniel Coyle dives into why. Armed with a unique outlook on what company culture actually is, and a keen understanding the importance of good culture (according to Coyle, one Harvard study estimates a strong culture to be worth an increase in net income of 756 percent over 11 years), Coyle analyzes 8 of the world’s most successful groups. As he explores a wide range of organizations, from the Navy Seals to a gang of Jewel thieves, Coyle finds that great cultures are the result of three distinct skills: building safety, sharing vulnerability, and establishing purpose. The question that remains with me is with so much culture being built in the past up close, how do we build culture from afar?
Tool I’m Using - Floodlight Invest
Hardy Capital was recently mentioned in a Forbes article as an early user of what will be a breakthrough data and technology platform through Floodlight Invest in order to bring values and transparency within client investments.
Values are a core part of our business and I always try to bring the latest technology to serve my clients in the best way possible. Floodlight is another prime example of the ability to make a great return without compromising values, while building the world we want to see at the same time. Take a look at the long form article here.
What I’m Listening To – Teaching Kindness Leads To Success
With children now going back to school while simultaneously being more involved with their parents academically, it is important to know that children pay attention. Children pay attention to what parents do, not what they say. According to Adam Grant, “They see their peers being celebrated primarily for the grades they get and the goals they score, not for the generosity they show.” Children see adults marking their achievements without paying as much attention to their character. Grant proposes passing down the virtue of kindness can actually lead to more success academically as well.
What does Grant recommend? Give just as much attention to “how did the test go” as “what have you done to help others?” In fact, he offers some evidence to suggest that you don’t have to force kids to pick between the two. Kids can be kind while still getting ahead in the world. Listen here.
Quick Take - IPO Market
There have been a flurry of IPO filings in recent weeks that will be available in the upcoming months and before the end of the year. Here are a few I am excited about:
Wish – Mobile Shopping app. Doubling Sales + Entering New Markets.
Risks: US China relations, customer retention through the app, competing with giants such as Amazon, Walmart, and Alibaba.
Asana- Collaborative workflow tool for remote work. Revenue growing at 90% and margins at 86% with growing demand for product as remote work increases.
Risks: Has $100M in losses it will need to fill. Will also need to fight off competitors in the space such as Slack, Microsoft Teams, Salesforce and other smaller players.
Snowflake – Cloud and data management. Revenue growing at 133% year over year and received an additional investment of over $550M from Warren Buffett’s Berkshire Hathaway.
Risks: Very crowded cloud space and along with a lack of additional revenue lines, are doubling losses every year as growth continues.
Quote of The Week
“When walking, walk. When eating, eat." - Zen Proverb