It’s no secret that when it comes to which stocks have been most resilient during this year’s turmoil, the usual suspects (if you will) have held up well during the pandemic, just as they dominated in the pre-COVID world.
“Working remotely, software/cloud, online shopping and socializing all benefit large technology firms [so] it should not come as a surprise that large tech stocks are near all-time highs”, JPMorgan’s Marko Kolanovic wrote last week, adding that “this could create (perhaps wrong) perceptions of conflicts of interest when the leading technology firms are influencing policies related to reopening, such as reimagining education, health care, vaccines, and contact tracing”.
Whatever kind of perceptions it creates over the medium- to long-term (and irrespective of the extent to which it invites more regulatory scrutiny), in the near-term, gains in big-cap tech have helped offset losses in cyclicals, value, energy and anything that needs a robust macro backdrop to perform.
This is the “winner-take-all” market – the “scroll hypnosis” economy.
Not surprisingly, retail investors are excited about the possibility of participating in the assumed upside in a post-COVID reality where only five (or so) companies control nearly all types of commerce and increasingly define the contours of social interaction.
Have a look, for example, at the following visual, which depicts a steep rise in Robinhood accounts holding Facebook, Amazon and Apple during the pandemic panic.
In their latest asset allocation recap, Deutsche Bank flags a similar rise in retail holdings of mega-cap growth more generally. The bank uses the same data from Robinhood.
“Prior to the COVID-19 shock, there were 150 thousand accounts on average holding a position in a mega cap growth stock, compared to 20 thousand for the next ten largest stocks and just 10 thousand on average for the rest of the stocks in the S&P 500”, the bank observes.
In the wake of the pandemic, Deutsche notes that while “the number of retail accounts has surged overall, across all stocks, the lead in number of accounts holding mega-cap growth stocks over the rest has now widened even further”. Have a look at this:
Considered in the context of the “perpetual motion machine” dynamics described in 2017 by Howard Marks, one is left with a familiar impression – there’s a distinctly inevitable feel to it all.
“The large positions occupied by the top recent performers – with their swollen market caps – mean that as ETFs attract capital, they have to buy large amounts of these stocks, further fueling their rise”, Marks said years ago, adding that “in the current up-cycle, over-weighted, liquid, large-cap stocks have benefitted from forced buying on the part of passive vehicles, which don’t have the option to refrain from buying a stock just because it’s overpriced”.
Now, we’re entering a new, post-pandemic world where these same names (which now comprise more than 20% of the S&P 500’s market cap) may benefit from an epochal shift in the way the world thinks about work and social interactions.
When you throw in the fact that the macro environment (i.e., the “slow-flation” reality) is conducive to further gains in secular growth names, you’re left to wonder how value, cyclicals, and, given the monetary policy backdrop, banks, can ever catch up. Yield-curve control in the US (e.g., if the Fed pegs the short-end, and promotes a steeper curve) could help US financials escape the fate of their European counterparts, but that’s an engineered outcome which is by no means guaranteed to work.
Over the past several months, the disparity in flows to large- and secular- growth names, on one hand, and everything else on the other, has been vast.
“Year to date, growth funds and secular growth sectors [like] technology, communication services and health care, have seen strong and steady inflows totaling over $75 billion, with the COVID-19 shock barely denting their momentum”, Deutsche Bank goes on to say, in the same note cited above. Meanwhile, value, financials, industrials, energy, materials, small- and mid-caps have hemorrhaged more than -$60 billion.
(Deutsche Bank, EPFR)
Consider that since the fourth quarter of 2018, value and cyclical funds have bled nearly a quarter trillion. Over the same period, inflows to secular growth have been around $75 billion.
On the latter point, Deutsche Bank says “the flows into secular growth funds are increasingly benefiting a small group of mega-cap growth stocks”. Why? Simple: Because as concentration within the funds rises, the inflows go disproportionately to the same handful of stocks, which in turn balloons their market cap further, and around we go.
Marks was correct in 2017. But he may have been wrong when he said “this seeming perpetual motion machine is unlikely to work forever”.
Perhaps the more accurate way to describe the situation is to hijack Harley Bassman’s amusing take on when demographics, politics and central bankers’ many follies will finally collide to disastrous effect: “Although I am certain of the denouement, it is possible its date is vastly longer than my career”.