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Tuesday, July 20, 2021
The stay-at-home trades comes back to life
Stocks did not have a good start to the week.
On Monday all three major averages fell more than 1%, with the blue chip Dow Jones Industrial Average (^DJI) losing more than 2%. And while these declines mean the S&P 500 (^GSPC) is only 2.5% from its record, underneath the surface of the benchmark index there has been plenty of pain to go around.
The small-cap Russell 2000 (^RUT) is now 8% off its record high. As we noted last week, sectors like Financials (XLF), Materials (XLB), and Industrials (XLI) — market leaders early this year on high hopes for the future of this growth cycle — have been under serious pressure, and are now at least 7% off their highs. And travel names like the airlines and cruise lines have also gotten pummeled, with all four major U.S. airlines down at least 12% over the last month.
Each of these names, of course, has had some wind taken out of their sail in recent months — Wayfair shares are down 20% from their highs while Peloton and DoorDash have lost more than 30%.
And the sluggish performance of these shares makes sense. If investors see vaccinations and a broad re-opening of the economy as a one-way street towards the end of the pandemic, then the questions about the next leg of growth for home remodeling, at-home exercising, and on-demand delivery become more interesting and more challenging.
But if investors think there’s a possibility that, at some point in the next several months, we’re living in a world more similar to what prevailed in 2020, then the growth story for each of these businesses gets a bit easier to tell.
The surge in COVID-19 cases and the spread of the Delta variant in the U.S. has very much been outside the market conversation in recent weeks. And between the rally in Treasury bonds, fears over inflation, and a lack of faith in the Federal Reserve to smoothly see us through this transition in the business cycle, there has been plenty for investors to fret about.
But the move we saw to start the week in some of the original pandemic winners is a clear sign that markets are now taking notice of the changing situation. And as a result, they’re falling back on what worked in the past to help see them through this instability.
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