To The Moon

Summary

• Bearish sentiment has dominated the financial markets since mid-September.
• Most sectors of the stock market have produced negative returns over the last 30 days.
• Technology and communications sectors remain strong, while utilities and consumer staples sectors have declined significantly.

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By Andrew Prochnow

Bearish sentiment has dominated the financial markets since mid-September, but the 2023 stock market rally stalled out well before that.

The year-to-date highs in both the S&P 500 and Nasdaq 100 were set in July, after which the stock market traded mostly sideways for about two months.

Since mid-September, however, the vast majority of the stock market has traded in negative territory. As highlighted below, virtually every sector of the market has produced negative returns over the last 30 days.

Sector Performance, Last 30 Days

• Communications Services (XLC), 0%
• Healthcare (XLV), -2%
• Technology (XLK), -3%
• Financials (XLF), -4%
• Consumer Discretionary (XLY), -5%
• Materials (XLB), -5%
• Industrials (XLI), -5%
• Energy (XLE), -7’%
• Consumer Staples (XLP), -7%
• Real Estate (XLRE), -8%
• Utilities (XLU), -9%

What’s most interesting about the above data is the varying impact the selloff has had on different sectors of the markets.

For example, considering that the technology and communications sectors were both up more than 30% on the year, the recent pullback has had minimal impact on the year-to-date returns of the XLC and the XLK. The XLC is still up by roughly 37% so far in 2023, while the XLK is still up 36%.

As such, the key market theme of 2023—strength in the technology/communications sectors—remains virtually unblemished.

On the other hand, the recent pullback looks far different when looking through the lens of the other major sectors in the stock market. For example, market sectors that were trading up nominally through mid-September—like XLE—are now barely up, or trading in negative territory.

In one case, the last 30 days have been so brutal that the sector is almost down 20% on the year. To wit, the utilities sector (XLU) has declined by about 9% over the last 30 days and has dropped by 19% year-to-date.

Traditionally, the utilities sector is one of the least volatile in the market. However, it’s also one of the sectors that is most sensitive to changes in interest rates, due to the fact that most utilities carry high loads of debt.

Taken all together, that means the stock market now has two market sectors that are up more than 30% on the year and one that’s down nearly 20%. After utilities, the other weakest sector performers include consumer staples (XLP) and real estate (XLRE), which are both down about 10% on the year.

Interestingly, the utilities and consumer staples sectors have historically been a couple of the top-performing sectors during economic recessions and depressions. That’s because powering one’s home and buying household staples are necessities, no matter how the economy is performing.

Considering that a recession could take hold at some point in 2024, one would expect that one of two things will likely occur in the coming months.

The utilities and consumer staples sectors will at some point outperform many of the other market sectors on a relative basis (assuming a recession does materialize). Or, the other sectors of the market will weaken, and play catch-up (to the downside) with the utilities and consumer staples sectors, as highlighted below.

Worst-Performing Single Stocks Over the Last 30 Days

Looking beyond the key narratives playing out at the sector level, there have also been some interesting patterns emerging in the single stock universe.

In the last 30 days, most of the sharpest pullbacks have been observed in small and medium-sized companies.

For example, of all single stocks with more than $10 billion in annual revenues, the only company down more than 20% in the last 30 days is AES Corp. (AES). Shares in AES are down nearly 28% over the last 30 days of trading.

However, when lowering the threshold to include single stocks with at least $300 million in annual revenues (i.e. smaller and medium-sized companies), the number of stocks down more than 20% in the last 30 days balloons considerably, as highlighted below.

Weakest Single Stocks, Last 30 Days

• NextEra Energy (NEP), -53%
• Ebix (EBIX), -52%
• Skillsoft (SKIL), -44%
• Inspirato (ISPO), -38%
• Oatly Group (OTLY), -38%
• Accolade (ACCD), -36%
• RealReal (REAL), -33%
• Bally’s Corp (BALY), -31%
• Enhabit (EHAB), -31%
• B&G Foods (BGS), -30%
• Enviva (EVA), -30%
• Big Lots (BIG), -27%
• CommScope Holding (COMM), -27%
• Trinseo (TSE), -26%
• Sleep Number (SNBR), -24%
• Inotiv (NOTV), -24%
• DISH Network (DISH), -21%

The above list does not include many well-known stocks, but one can find those on a different list—stocks that are trading at (or near) 52-week lows.

Highlighted below are some of the notable stocks that recently hit 52-week lows, and their associated year-to-date (YTD) returns.

Single Stocks Marking Fresh 52-Week Lows in Early October (YTD return)

• Coca-Cola (KO), -16%
• Bank of America (BAC), -22%
• Bank of Montreal (BMO), -11%
• Block (SQ), -32%
• Bristol Myers (BMY), -22%
• Citigroup (C), -11%
• Clorox (CLX), -12%
• Conagra (CAG), -32%
• DexCom (DXCM), -27%
• Enbridge (ENB), -18%
• General Motors (GM), -9%
• Hershey Co (HSY), -14%
• Keurig Dr Pepper (KDP), -15%
• L3Harris Technologies (LHX), -21%
• McCormick (MKC), -23%
• MetLife (MET), -15%
• 3M (MMM), -28%
• NextEra (NEE), -40%
• Norfolk Southern (NSC), -23%
• Paramount (PARA), -31%
• PepsiCo (PEP), -11%
• SolarEdge (SEDG), -56%
• Target (TGT), -31%
• Verizon (VZ), -23%

The above list seems even more striking when one considers that stocks such as Tesla (TSLA) and NVIDIA (NVDA) have skyrocketed by 140% and 220%, respectively, in 2023.

Those gains help explain why the Nasdaq 100 is up nearly 37% in 2023, while the S&P 500 is sitting on a nominal gain of roughly 12%.

And much like 2023 performance in the market sectors, the divergent nature of the technology stocks (TSLA, NVDA) as compared to the balance of the market (the stocks listed above) suggests that at some point, one of these trends will start following the other.

Either the technology and communications sectors will weaken, or the balance of the market will strengthen. Because it seems fairly unlikely that the current divergent market paradigm will persist.