One of the early signs of a recession is a flight to relative safety by big money. When large fund managers want to continue to be in equities, yet want to be on solid ground in case the market tanks or a recession hits, they move from higher risk small cap growth towards large cap companies that have lots of revenue, cash, dividends and ideally growth. These days, in addition to consumer staples, this large cap basket includes technology driven companies that are clear leaders in growing markets, such as Amazon AMZN 3.656,64 +18,61 +0,51%, Facebook Facebook, Inc. 369,79 +18,60 +5,30%, Google Google Inc. 2.727,63 -8,30 -0,30% and Netflix NFLX 519,30 +0,39 +0,08%.
With the Dow Jones Unfortunately, we could not get stock quote INDEXDJX:.DJI this time. just surging 370 points yesterday and Amazon, Google, Netflix, Facebook and other companies hitting new all-time highs this week, how can this be anything but an unstoppable bull market? Despite the lofty rally, let’s not lose sight that the DJIA just inched yesterday into positive territory for 2015. This was after 6 years of stellar growth.
Historically, consumer staples has been a leading sector when this cyclical flight to safety begins, as it is presumed that even in a recession, consumers need their bread and Pepsi PEP 156,49 -1,45 -0,92%. Thus, it is no surprise that has been one of the strongest this month, along with a big run up for Telecom, another safe sector.
The obvious victim is Energy, due to falling oil prices. The drop in commodities has been a very strong sign of slowing global growth; but, at least with oil, this could be partially explained with an increase in production in recent years.
Of notable optimism has been the Information Technology sector. But, is this another tech run like 2000? Or is this the result of large technology companies becoming the new consumer staples? Can you live without Google and Netflix? Indeed, they do seem to have found a sweet spot of being technology, growth and consumer staples. This is one explanation of a decades old company like Amazon having a P/E ratio near 1000, albeit not the only possible reason.
The real evidence this rally is a cyclical shift away from small cap risk rather than an all out bull market, however, is in what didn’t do nearly as well yesterday, or this past month. Comparing the heavy weight indices — the DJI and Nasdaq, with the mid and small cap filed Russel 2000 and Microcaps IWC 144,42 +2,40 +1,69% reveals the love has not been broadly received.
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With a combined market cap of nearly 1 trillion dollars, Amazon, Google, Facebook and Netflix took the Nasdaq to a new high this week, as they themselves hit new highs. As we can see with the Russel 2000, down 5.58% from its high, this is not a broad rally. Microcaps are down 7.63%, near correction territory. Traditional growth companies are being left behind. Combined with the performance of consumer staples, this is looking like a pre-recession cyclical rally.