Despite recent weakness, expect buybacks to help support the market … look for a break to new highs later this fall … a preview of the amazing technologies headed our way this decade
Coming into September, it seemed just about everyone was expecting a market pullback.
And whether it was a self-fulfilling prophecy, market dynamics, or just seasonal weakness, this month has, in fact, seen losses.
As I write Friday at lunch, the S&P and Nasdaq are down 1.7% and 1.3%, respectively, on the month. The Dow leads the losses, off 2.1% so far in September.
If your portfolio is in worse shape, that’s because pockets of the market have been underperforming the broader indexes for weeks now.
About 15% of S&P 500 stocks are more than 20% below 52-week highs, but much larger swaths of the midcap and small-cap universe are down 20% or more. The latter groups are less tech-focused and more susceptible to an economic slowdown:
Slow motion deterioration
(percentage of stocks that are 20% or more below their 52-week highs)
- S&P 500 15%
- S&P Midcap 30%
- S&P Small Cap 48%
Below are a handful of widely-owned stocks, as well as the percentage by which they’re now trading below their 52-week high.
American Airlines 26%… FedEx 20%… Nordstrom 41%… Pulte 26%… Eli Lilly 14%… Dupont 20%.
***What are we to make of this? Are we slowly slipping into a stealth correction?
Let’s go straight to our technical experts, John Jagerson and Wade Hansen of Strategic Trader:
After breaking to new all-time highs and briefly riding above up-trending resistance a few weeks ago, the S&P 500 started pulling back last week on some post-Labor Day profit-taking.
While this pullback has gotten the permabears out there all hot and bothered, this pullback is just that… a pullback.
It’s not the beginning of the end.
There’s just too much demand for U.S. equities to allow the S&P 500 to break below the up-trending support level that has been interacting with the index since May.
Daily Chart of the S&P 500 (SPX)
***One factor that will keep the bull market going
In John and Wade’s Wednesday update, they pointed toward a reason why stocks have support, despite the current volatility – share buybacks.
For any readers less familiar, when a company has extra cash, it can use it to buy back its own shares, in effect “retiring” or canceling those shares.
Assuming the company is still generating the same amount of profit, fewer shares will boost a company’s earnings per share (EPS). This is a benefit to shareholders.
Here’s John and Wade illustrating how this works:
For example, if a company earns $100 and there are 100 shares outstanding, the EPS is $1 ($100 / 100 shares = $1 per share).
Similarly, if a company earns $100 and buys back 50 shares so there are now only 50 shares outstanding, the EPS is $2 ($100 / 50 shares = $2 per share). The company didn’t increase its earnings at all, but by buying back its shares, it doubled its EPS.
Today, we’re seeing companies resume their share buyback programs following a COVID-19-related slowdown.
John and Wade provided the chart below, illustrating the ramp-up in buybacks here in 2021.
Quarterly S&P 500 Buybacks (source Yardeni Research)
Back to the Strategic Trader update:
This increase in share buybacks among S&P 500 companies is good news. Buybacks had slipped during the pandemic, but they are making a strong comeback in 2021.
We expect more companies to announce increased buyback programs as we head into Q4. This should keep demand for S&P 500 stocks strong in the near-term.
So, returning to our question at the top of today’s Digest, what are we to make of the recent pullback in the market?
Here’s John and Wade’s bottom-line:
We’ve been here before.
The S&P 500 climbs to new all-time highs and traders take profits. This pushes the index lower, which attracts more buyers.
We expect this pattern to continue for the foreseeable future.
***Let’s end today with a fun look at the amazing technologies that will be in your portfolio tomorrow
Bank of America Global Research just released a 152-page research report that highlights 14 “radical technologies that could change our lives and accelerate the impact of global megatrends.”
According to the report, these technologies have a market size of $330 billion today. But by next decade, they could explode to $6.4 trillion.
As we’ve noted here in the Digest, the 2020s will be the most transformative decade in human history. That’s because technology is leading to exponential progress, not traditional linear progress.
The BofA report echoes this point:
The pace at which themes are transforming businesses is blistering, but the adoption of many technologies – like smartphones or renewable energy – have surpassed experts’ forecasts by decades, because we often think linearly but progress occurs exponentially.
Here are the 14 “radical technologies.” We’ll dig into a handful below.
- Brain Computer Interface
- Emotional Artificial Intelligence
- Synthetic Biology
- Bionic humans
- Wireless Electricity
- Nextgen Batteries
- Ocean Tech
- Green Mining
- Carbon Capture & Storage
Here’s more detail on a handful of these moonshot technologies.
From the BofA report:
Brain Computer Interfaces: “As we reach a point where humans are unable to keep up with computers and AI, brain computer interfaces could help ‘level up’ humans with computers. Shorter term, brain computer interfaces hold solutions for paralyzed individuals and promise a new wave of innovation in gaming.”
Immortality: “Traditionally, aging has not been viewed as a disease that can be treated but this is changing. Actors in this space are increasingly looking to tackle the hallmark of aging via pathways such as ‘genomic instability, telomere attrition, mitochondrial dysfunction, and cellular senescence’ among others.”
eVTOL: “Electrical vertical take-off and landing vehicles that could provide an alternative mobility transportation solution to outdated infrastructure and overly stressed roads in urban settings.”
Holograms: “A technology capable of creating a simulated environment through light imagery projections that will allow everyone to come together in one virtual room, without having to leave their physical location.”
Metaverse: A “future iteration of the Internet, made up of persistent, shared, 3D-shared spaces linked into a virtual universe. It could comprise countless persistent virtual worlds that interoperate with one another, as well as the physical world and transforming markets such as gaming, retail, entertainment etc.”
It’s hard to look at this list and not be excited about what’s coming this decade – from both a societal and portfolio perspective.
We’ll keep you up to speed with the development of these trends here in the Digest.
Have a good evening,