Friday's Market Minute: These Are The Stocks To Be Worried About

Faster-than-expected economic recovery is making investors revisit what kind of assets they want to own. Rising Treasury yields are picking up momentum, and tech stocks are dragging on the market. They’re down 1.8% coming into Friday, so it’s not much to write home (or in a newsletter) about just yet. But what if the selloff in bonds accelerates? Thankfully, investors have a pretty clear blueprint for such an event if they look back to September 2019.

That’s when the trade war came to an anticlimactic close, Powell said he was done cutting rates, and bond yields posted the sharpest weekly percent gain in 30 years. That spurred a “quant quake” in which momentum stocks were thrashed, value stocks rallied, and all the major trends flipped on their head for a minute. It’s very – perhaps alarmingly – easy to see how such an event could happen today, with even more ferocity. I ran a scan of the market during that period from Sep 3 to 13 to get a better sense of what would be exposed today if such an event occurs.

Momentum stocks that were the best performers over the preceding six months were of course highly correlated with underperformance, but sorting by companies whose price to sales climbed the most did a better job of isolating the stocks that got hit the hardest: The top decile of valuation gainers in the S&P 500 lost a median 3.8% during the period, compared with a 1.5% decline in the stocks whose price had risen the most. There were 767 companies in the Russell 3000 Index whose price/sales ratio was up from the year prior, with an average gain of 0.5 points. Today, 1,815 have seen their valuation climb, for an average 1.7 points. This market is much, much more exposed, and the companies that look at risk span a wide array of sectors and themes.

There are tons of pharma stocks (TGTX, MRSN, ARNA, INO), software companies (TWLO, DDOG, ROKU, OKTA), and of course, electric vehicle plays (WKHS, FCEL, TSLA). But there are also recovery stocks like LVS, WYNN, and BKNG, and new-era staples like TWTR, ISRG and NVDA. Simply put, if the past is any precedent, a spike in rates like we got in 2019 would likely be a very destructive force for a broader swath of the market.

Photo by Ishant Mishra on Unsplash