Panic, Interrupted

Almost an 'everything up' day... But fear is still high... Smaller stocks are winning right now... A look at the S&P 500 Equal Weight Index... Know your indexes... A good sign for the future...

Nearly 'everything' was up today...

Following an even day yesterday, the major U.S. indexes all rose... The tech-heavy Nasdaq Composite Index finished the day about 3% higher, the benchmark S&P 500 Index was up 2.3%, the small-cap Russell 2000 Index 2.4% higher, and the Dow Jones Industrial Average up 1.8%.

In fact, it was nearly an "everything up" day.

Bitcoin is about 8% higher than it was a day ago, and emerging markets, Japanese indexes, oil, gold, and every major S&P sector closed up, with tech the biggest gainer. Bond yields rose some, too, meaning prices fell.

While the general trend of job-market weakening remains in place, the latest initial weekly jobless claims were at least part of the bullish catalyst today. The U.S. Department of Labor reported 233,000 first-time filings (in a seasonally adjusted figure), which is less than Wall Street had feared and less than we saw last week.

Blowout earnings from drugmaker Eli Lilly (LLY) helped the S&P 500 as well. Eli Lilly shares closed 9.5% higher after it reported beating quarterly expectations and raised its full-year revenue outlook by $3 billion.

Yet the market's still relatively 'on edge'...

The market's "fear gauge" – the CBOE Volatility Index, or VIX – dropped a touch to around 25. That's much lower than the 60-plus we saw on Monday morning, but the measure is still in what we consider elevated territory and higher than at any point since March 2023's regional-banking kerfuffle.

The VIX measures options activity on the S&P 500, and a higher reading means more investor concern and uncertainty about market direction.

This means that while investors are quickly enjoying some distance between the mini panic of late last week and Monday, enough folks with enough money in the market see significant risks to going "all in" right now...

I (Corey McLaughlin) don't blame anyone who feels that way...

In fact, being at least somewhat defensive isn't a bad idea right now.

As I've said lately, "bad news" for the economy has started to show up as "bad news" for stocks.

A rising unemployment rate over the past several months has triggered the Sahm rule, which has been linked with the early days of each of the past 12 recessions stretching back to 1949. We hesitate to declare that "this time is different."

We could write entire books about the state of fiscal and monetary policy, and its role in driving inflation and much other unrest we see in the U.S. and the world today. (Some of us at Stansberry Research already have.)

That doesn't mean, though, that the "stock market" – and some individual stocks more than others – still can't rise, like what happened today. Nor does it mean the market has no opportunities to profit. We'll get to some momentarily...

It just means to keep an eye on more evidence of a possible U.S. recession either having already begun or still to come and the consequences.

You heard this message if you tuned into the free video that our founder Porter Stansberry, Stansberry Research senior partner Dr. David "Doc" Eifrig, and Stansberry's Investment Advisory lead editor Whitney Tilson recorded yesterday. Their wide-ranging, unscripted conversation was hosted by our Director of Research Matt Weinschenk.

In case you missed it, you can watch a replay right here...

Be wary of the expensive today...

As Whitney wrote in his free daily letter today about yesterday's emergency briefing with Porter, Doc, and Matt...

During our conversation, there was something all four of us agreed on...

The stock of Nvidia, as great of a company as it is, is unlikely to outperform – and could even lose half its value – from here because of its extreme valuation.

As of yesterday's close, it has a $2.4 trillion market cap and trades at 32 times trailing revenue and 61 times trailing earnings.

As I mentioned yesterday, one of Porter's most significant points during the conversation was that the grossly high expectations for a company like Nvidia are unlikely to be met in the years ahead, even if the company is a promising business.

As Whitney mentioned during the discussion, Nvidia today reminds me of Cisco Systems (CSCO) at the peak of the Internet bubble in 2000... You can read his full analysis and comparison here.

'Smaller' is winning right now...

While popular mega-cap names of the two-year bull run are down lately – like Nvidia, which is 23% off its all-time high of June 18 – we've seen signs of money "rotating" into smaller stocks.

Before the recent spate of volatility, the Russell 2000 was up around 10% in a matter of days and had been outperforming large-cap indexes. Small-cap stocks gave away most of those gains late last week and on Monday, but they're 4% higher this week.

Here's another sign the market isn't quite in the freefall that it might "feel" like... Stansberry Research senior analyst Brett Eversole looked at the S&P 500 Equal Weight Index in his "Review of Market Extremes" sent to True Wealth Systems subscribers yesterday.

The S&P 500 Equal Weight Index is different from the standard S&P 500 Index, which is quoted in most places as the U.S. stock market benchmark.

Why 'equal weight' matters...

Like most major indexes, the benchmark S&P 500 is weighted by market cap. In other words, the largest U.S. companies, like Apple, Microsoft, or Nvidia (which has a $2.5 trillion market cap), represent a greater piece of the index than smaller S&P 500 businesses like Ross Stores or General Mills (which has a roughly $39 billion market cap).

So the overall index moves in more tandem with Apple and Nvidia than with Ross or General Mills.

The S&P 500 Equal Weight Index, however, considers everyone equal.

When you're looking at the overall health of big U.S. companies, how General Mills is doing means just as much as Nvidia or any of the other hundreds of stocks represented in the index. So you could argue the Equal Weight Index is more representative of the "stock market" than the standard benchmark. Or you might decide that big companies' performance really does matter more. It's just a matter of preference.

Either way, it's good information to know so you know what the indexes are actually telling you. (That goes for any index, by the way. Take a look at the allocation in your favorite index or ETF if you never have before and what you see might surprise you.)

Here's why we bring all this up...

During the bull run since the fall of 2022, owning mega-cap stocks has been successful. "Everything else" has lagged. But that's not the case right now. The Equal Weight Index has been outperforming. And as Brett wrote...

Buying the equal weight index hasn't been a good strategy in recent times. Owning less of the biggest stocks would have meant missing many of the strongest performers of the past few years. But last month, this index staged a breakout. Take a look...

The equal weight index recently broke out to a new all-time high. And it hit a new 52-week high at the end of July.

It is hard to say the entire market is weak if the S&P 500 Equal Weight Index is making new highs.

This is a generally bullish momentum indicator...

Even with the pullback in recent days, "that second breakout is worth paying attention to right now," Brett wrote. That's because history suggests that similar setups have led to more gains in the next six and 12 months, about in line with average returns.

As Brett explained...

I looked at every similar setup since 1990. New 52-week highs have happened 25 other times since then. And the index tends to keep rising after rallies like these. Take a look...

The equal weight index may not have kept up with the S&P 500 in recent years, but it has been a smart investment over history. It has gained 9% per year since 1990 – even better than the 8.2% annual gain we've seen in the regular S&P 500 over the same three decades.

We can debate or discuss the reasons why this is. But the point is, this context – a basket of equally weighted stocks breaking out to new 52-week highs – typically leads to more gains for this same basket of stocks.

These setups have led to gains 84% of the time a year later, "so the odds of success are high," Brett said.

In other words, put this into the camp of evidence suggesting not to panic over the recent pullback and putting the Japanese yen/U.S. dollar "carry trade" back into the closet of risks for the time being.

As we reported yesterday, the Bank of Japan has reversed course on the idea of raising rates again, and the shock of the thought of a possible U.S. recession appears to be wearing off. For now.

If anything, recent behavior suggests better times ahead, not worse... at least for most S&P 500 stocks. That doesn't mean, though, that the biggest (and you might say, "overvalued") names – and the broader U.S. benchmark index that's so closely tied to them – can't see more downside ahead.

New 52-week highs (as of 8/7/24): Alpha Architect 1-3 Month Box Fund (BOXX), CBOE Global Markets (CBOE), Fair Isaac (FICO), Viper Energy (VNOM), and the short position in SolarEdge Technologies (SEDG).

In today's mailbag, feedback on yesterday's emergency market briefing... and Stansberry Research senior analyst Alan Gula answers a reader question about luxury-goods companies... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Thank you!!! for having this live presentation on short notice. It's fine to read information about the latest market craziness but really helpful to hear these experts talking about it and giving ideas. And thank you for including when the video was recorded." – Subscriber Nancy P.

"As always the insight from Porter, Doc and Whitney is outstanding. The question I am posing to all three is, [if] what has happened in the past [with] previous slowdowns and recessionary periods is as predicted, [what happens] regarding the purchasing of luxury items like whiskey and cars by the top percentile and upper middle class populations worldwide? As we know, many developing countries have their classes shifting to the next level up. How will a global slowdown affect their purchasing decisions? Thanks for your attention." – Subscriber Michael P.

Corey McLaughlin comment: Michael, thanks for the note. I shared your question with our team, and Stansberry Research senior analyst Alan Gula put together his take – about what a recession might mean for luxury-goods companies and their stock prices...

Alan is the lead analyst for our flagship Stansberry's Investment Advisory publication, where he works closely with Whitney. Alan is also part of our Portfolio Solutions team. As he explains...

Luxury-goods makers are often perceived as recession-proof, since wealthy consumers typically continue to buy no matter what's going on in the economy.

However, it's important to distinguish between the recession-resistance of the underlying business and the stock price, which can fall precipitously – even absent a decline in sales or profits.

Consider LVMH, which makes Louis Vuitton handbags and owns the Dom Perignon champagne brand. In 2008, during the global financial crisis, LVMH saw its revenues rise by 4% and its net income was about flat from 2007. But in 2008, LVMH's stock fell by 45%. That was worse than the decline for the S&P 500, which fell by about 38%.

Or how about Hermes, which is the epitome of luxury. The company had a fabulous 2022 in terms of results. Sales rose about 23% (in constant exchange rates). But from late 2021 to mid-2022, Hermes' stock suffered a 40%-plus decline.

Bottom line, if there's a recession, or even a growth scare like there was in 2022, most luxury stocks won't be a refuge for investors... even if corporate results hold up.

If you're worried about how your portfolio will hold up during a slowdown, then you might consider The Total Portfolio, which is a fully allocated, fully diversified portfolio. It includes a blend of securities and ETFs that should hold up well in a recession or bear market.

Hope this helps, Michael. I know I found Alan's insights interesting and useful.

I'm also reminded of something Porter said during the emergency briefing we published yesterday: "Stock prices more often reflect emotion than they reflect intrinsic business value."

All the best,

Corey McLaughlin
Baltimore, Maryland
August 8, 2024