Stock Groups

The stock market is undergoing a slow motion deterioration with pockets of shares down 20% or more

by Mike Robinson

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Traders on the floor of the New York Stock Exchange.

Source: NYSE

The land mines for the markets are becoming more numerous. With seasonal weakness, uncertainty about the effect of the delta variant’s impact on consumer behavior, high labor costs that affect pricing and delivery, as well as poor data from China, the market is continuing to be affected by this.  

While the S&P 500 is still about 1% from its highs, those land mines are taking their toll on large sectors of the market.

CFRA’s Sam Stovall stated in a recent client note that most stocks had declined over the last few months. “This is evidence of weakening markets.”

This divergence has also been noted by other strategists.

Scott Minerd, Guggenheim’s strategist said that as the equity market hits new heights, divergence at the advance-decline lines suggests we might be near a top. This divergence in the advance-decline line has been indicating that the market may be vulnerable to a sale-off.

The 20% decline club is getting larger

About 15% of the big-cap S&P 500 are more than 20% below 52-week highs, but much larger swaths of the midcap and small cap universe are down 20% or more — those groups are less tech-focused and more susceptible to an economic slowdown:

Slow motion deterioration
(percentage that are 20% or more below 52-wk. highs)

  • S&P 500            15%
  • S&P Midcap      30%
  • S&P Small Cap  48%

The Covid-related weakness is affecting sectors associated with the reopening, such as industrials and retail.

In a note to clients, Blerina Uruci of Barclays stated that this phase of the pandemic presents downside risks for the economy’s recovery. She also noted that inflation components are more vulnerable to disruptions in service demand.

Industrials/Materials
(% off 52-wk. highs)

  • American Airlines    26%
  • FedEx                         20%
  • Dupont                       20%
  • PPG                            18%
  • Caterpillar                  17%
  • Stanley Black & Decker  17%
  • Lockheed Martin       14%
  • 3M                          12%

Retailers
(% off 52-wk. highs)

  • Nordstrom             41%
  • Gap                         36%
  • Abercrombie         24%
  • Kohl’s                      19%
  • Ross Stores           16%

The China slowdown — particularly the decline in retail sales due to Covid issues — is dramatically affecting luxury retailers, many of which are based in Europe.

Luxury Retailers
(% off 52-wk. highs)

  • Kering                     21%
  • Tapestry                 20%
  • Richemont             17%
  • Movado                  15%
  • LVMH                      14%

Supply chain and labor problems are affecting the ability of some homebuilders to fully deliver on orders.

Home builders
(% off 52-wk. highs)

  • Pulte                      26%
  • KB Home               21%
  • DR Horton              17%
  • Lennar                    11%

Concerns about controls on drug prices from the Biden administration has also affected Big Pharma in the past couple weeks. 

Big Pharma
(% off 52-wk. highs)

  • Eli Lilly                 14%
  • Bristol Myers Squibb      11%
  • Merck                  11%
  • Johnson & Johnson  8%

A breakout or breakdown?

Dubravko Lakos Bujas, JPMorgan’s strategist, remains bullish. However, even Lakos Bujas acknowledges that it can be difficult to interpret the economic landscape. In a note to clients, he stated that the current cycle was more challenging to analyse due to the unique nature of the pandemic and its impact. “This cycle is essentially an overlay of two intertwined cycles — a Covid cycle and a regular business cycle (incl. labor, capex, inventory).”

Many strategists and analysts remain bearish. The theory is that the Delta variant will be a decreasing force, and earnings won’t materially drop. Lakos Bujas explained that the Delta variant will ease and we can expect this to lead to a better holiday season than last year, as well as a pickup in cross-border activity at still low levels.

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