Noonum Week in Themes: a Rally in Growth, Chinese Tech, and Spending on Gas
What happened?
Let’s imagine you were incommunicado last week.
Completely shut off from charts, any Bloomberg terminal, and chatter from around the Street – your only insight into the happening of the outside world – a few press clippings and headlines.
At the end of the week, you’re told the S&P 500 had a 6% move and are forced to guess in which direction.
You assemble your smattering of headlines into a disjointed collage that reads:
- Fed’s Powell Sees the Light and Turns Far More Hawkish Than Expected - Marketwatch
- Fed Lifts Rates, Sees Seven Hikes in 2022 as Inflation Soars - The Street
- Bullard, Explaining Dissent, Says Rates Should Top 3% This Year - Reuters
- Russia’s War Gets Closer to Nato - WSJ
- No Progress on Ceasefire After Kyiv-Moscow Talks - BBC
- Shenzen Imposes a Lockdown and Shanghai Restricts Nonessential Travel as New Cases Jump - NYT
Against this backdrop of negativity and fear, it’s tough to understand how the S&P 500 managed a 6.2% five-day gain, good for its best week since November 2020.
Perhaps it was continued hopes that a ceasefire agreement could be reached and finally bring an end to four weeks of devastation in Ukraine.
Attributing the rally to hopes for a resolution seems like a stretch – each time the sides meet for talks, Russia intensifies its airstrikes in an apparent attempt to gain leverage. Given precedence, Putin’s rhetoric, and the scale of the invasion, a near-term resolution seems highly unlikely.
Could it have been the market accepting (even embracing) the Fed’s desire to hike seven times this year?
The market hates uncertainty above all else, so there’s a chance we needed to get through the Fed’s announcement and Fed Chair Powell’s presser to see a relief rally for no reason other than it happened and was in the past. Powell has repeatedly sought to remind the market that the Fed is data dependent, and that it has the tools to adjust course if needed.
But against a backdrop of 7.9% annual inflation, a war on NATO’s doorstep, and a pandemic door that creaks open every time it finally closes shut, can the Fed really finagle a soft landing?
Perhaps no market watcher better captured the mountain of macro headwinds the Fed must navigate in coming months than David Rosenberg, captured in Randall Forsyth’s weekly column at Barron’s:
“The Fed has never tightened into such a maelstrom before – a shooting war, a pandemic, a weak and wobbly stock market, and an incredibly flat yield.”
Themes in focus:
What worked?
Pretty much anything that’s been beaten down
High growth. High multiple. Cathie Wood names. Software. Cloud. 2021 IPOs.
Maybe stocks, particularly the most beaten up parts of the market, were so oversold and hated that a bout of short covering and risk-on was inevitable.
We saw huge snap back rallies across the board for the high fliers of 2020 that have been dumped indiscriminately for the last several months.
Front and center was Cathie Wood’s much maligned ARK Innovation Fund (ARKK) which surged 18.3% on the week. The Fintech Innovation Fund (ARKF) fared even better, posting a 22.8% gain.
A core holding in both funds, Square (SQ, +38% last week) led the way and looks to be a key proxy of investor appetite for growth right now.
Other standouts included the Global X Cloud Computing ETF (CLOU, +10.7%), blockchain and crypto-exposed equities (BLOK, +12.8%), and the Renaissance IPO ETF, +15.8%.
Despite last week’s bounce, this group has a ways to go to put a meaningful dent in the losses it has sustained since the growth selloff began in earnest in early November 2021.
YTD losses:
ARKK: -30.5%
IPO: -24%
CLOU: -19.9%
SOCL: -19.5%
BLOK: -15.1%
Chinese Tech
A correction to the assertion that there’s been no more hated group than those mentioned above.
For nearly the entire year, that crown has been worn by Chinese tech stocks.
What started as an attempt by the Chinese Communist Party to reduce inequality by cracking down on tutoring and education companies trickled into condemnation for property and tech giants.
The CCP’s intolerance for companies with capitalist aspirations sparked a selloff in domestic equities and their foreign listings (ADRs) that has devastated funds like the KraneShares China Internet ETF (KWEB).
Investor fears compounded in recent weeks on new concerns that U.S. regulators might force a delisting of Chinese companies included in U.S. exchanges.
Signs of progress in conversations between American and Chinese officials last week helped calm those concerns and sparked a dramatic reversal in KWEB, which rallied 40% intraday on Wednesday and notched a 28.8% gain for the week.
Other funds with international e-commerce exposure also saw sizable gains, with the ProShares Online Retail ETF (ONLN) rallying 16.3%.
Understand it with Noonum:
Today’s companies often don’t fit neatly into a single industry or sector classification. They have diverse business lines, revenue streams that aren’t related or represent different industries, and diversified investment portfolios.
That’s even more true for ETFs or mutual funds that profess to do one thing, but have cross-industry exposure that isn’t readily understood by investors.
While ONLN certainly gets an investor exposure to retail and e-commerce, there are a number of other telling themes driving this fund that can easily be understood through Noonum.
You can drill more granularly into the retail components that are driving the fund – from art to auto parts to pet supplies, understand which stocks have the most exposure to loyalty programs (1-800-flowers.com), and discover which holdings are investing in fulfillment centers (JD.com, Chewy).
Companies whose margins hinge on the price of oil
Strong demand and insufficient supply, exacerbated by a reluctance on the part of OPEC and U.S. producers to raise output and mounting sanctions against Russia have played a part in the unprecedented rally in oil and gas in recent weeks.
Crude topped $130/barrel on March 7th on fears that NATO countries would sanction Russian oil exports, further worsening a global shortage.
Those fears have proven overblown, at least for now. Crude slid briefly back below $100 last week and closed at $104.70 on Friday.
That’s good news for transportation companies such as airlines and cruise ships, where oil is often their highest cost and short-term fluctuations can be difficult to perfectly hedge or pass back through to customers.
Norwegian Cruise (NCLH) and Carnival Corp (CCL) both gained over 13% last week.
Within the airline complex, gains were even more pronounced as Delta Airlines (DAL, +17.5%), American (AAL, +19.5%), and United (UAL, +21.5%) all saw strong performance.
What struggled?
Not much. It was largely risk-on across the tape, though some recent outperformers, defensive plays, and safe-havens took a breather.
Defense contractors
Unsurprisingly on reversion weeks, the recent outperformers took a step back last week.
Defense contractors Lockheed Martin (LMT, -2.9%), Raytheon (RTX, +0.6%), and Northrop Grumman (NOC, -1.9%) have all had sizable moves on expectations that the war in Ukraine will spark a fresh wave of military spending.
Find it with Noonum:
We recently highlighted Maxar Technologies (MAXR) as a little known tech name that has seen enormous gains and is often overlooked in defense-focused funds.
Maxar is a communications company that provides high quality satellite imagery to governments and the media. While traditional defense contractors lagged last week, Maxar bucked the trend, finishing up 10.2% last week.
Using Noonum’s concept explorer to find companies with exposure to “defense spending, military equipment, and weapons systems”, Maxar emerges as one of the most highly exposed companies.
A number of cyber security stocks also emerge as companies exposed to defense spending that stand to benefit as military budgets evolve to allocate more spending towards cyberdefense.
Noonum identifies CyberArk (CYBR, +4.56% last week) and Fortinet (FTNT, +14.63%) as two standouts with high exposure.
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Want to get in touch?
Reach out at eamon@noonum.com