Summary
- The week ended November 6, 2020 saw the S&P 500 rise by +6.04%; the index is now up +8.79% YTD. Risk was the big election week winner, with the marijuana sector gaining +25% in five days, technology (XLK) up +9.39%, Communication Services (XLC) +7.66% and Health Care (XLV) +6.21%.
- Credit spreads, volatility and equity risk premia fell. But certain sectors stand out for their poor performance:
- Prison break (down) – The private prison sector may be the least ESG-friendly of all and has become a market pariah. Banks won’t lend to them anymore, which is an issue for these debt-laden operators. Public prison bonds trade around 66 cents, and the 15% appears risky. President-elect Biden looks to end federal contracts with the public prison companies (an est. 30% of revenue), and the industry faces reform of their roles in immigration and the insane “war on drugs”. GEO and CXW are down -25% the last month and down -55% YTD.
- Another Biden target – the energy sector – continued its horrific decline; oil & gas stocks fell -3.70% on the week and that sector is now down -57% YTD; XLE is down -51% YTD. ExxonMobil XOM (-5.6% MTD and -53% YTD) Is emblematic of these value traps: the indicated 10% dividend yield is impressive – less so its 105% dividend payout ratio and earnings which peaked in 2008; divvy cuts appear likely.
- Factor-wise, three of the top YTD factors were also best on the week: Momentum, Price Target Revisions and Volatility. Market leadership has reverted to pre-election leaders, i.e., growth stocks have regained momentum.
- One of the most meaningful signals from the Factors in 2020 is how the poor performance is of companies with large Share Buybacks. We can’t emphasize enough how bad an idea it is to buy a stock in 2020 because of their share repurchase program. The “Buyback Kings” — the 50 members of the S&P 500 members with the largest buybacks — are now down -38% YTD on average.
- Our FlowPoint Work From Home Index (WFH) rose +9.88% on a recent surge in new virus cases. We also note the pro-cyclical market message of the FlowPoint Reopening Index which rose +11.86%. Additional pro-cyclical messages include the breakouts in copper and semiconductors to new highs.
Week Ending October 6, 2020 Factor Performance – Russell 3000 Index
Source: FlowPoint, Bloomberg
Source: FlowPoint, Bloomberg
Source: FlowPoint, Bloomberg
Source: FlowPoint, Bloomberg
Source: FlowPoint, Bloomberg
Source: FlowPoint, Bloomberg