Groundhog Day for the Reopening Trade?

by Charlie Toole, Vice President and Portfolio Manager

The S&P 500 has hit a series of new highs—but the view from above doesn’t tell the ongoing reopening trade story. The index’s gains have been driven by large technology and communication stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company.; meanwhile, many other companies in the index have failed to keep up. This divide represents an opportunity for investors.

At Tuesday’s close, the average stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. in the S&P 500 was down more than 8% from its all-time high and one-third of the index constituents were 10% or more below their all-time highs.

One hundred and seventy stocks in the S&P 500 (33% of the index’s members) were trading below their 50-day moving average, a sign of slowing short-term momentum.

But despite those stats, the index has continued to hit all-time highs due to the outperformance of a slim group of stocks. One culprit behind the narrowing leadership has been the spread of the delta variant of COVID-19 this summer.

A Reopening Trade II Could Be in the Offing

New COVID-19 cases are now slowing in some of the hardest-hit Southern states. This could spur a broadening of the stock rally and a second act for the reopening trade we saw in the first quarter of 2021.

Signs of a slowdown in the spread of delta are being confirmed by managers of health care companies. On Tuesday’s earnings call, Karen Parkhill, CFO of Medtronic, said she expects U.S. infection rates to peak between late August and early September—if true, this will be good news on multiple fronts.

Apart from fewer people becoming ill and reduced strain on hospital capacity in affected areas, it means reopening trade stocks will have the chance to shine again as people regain the confidence to go out for dinner or travel. This would reverse a slowing trend of restaurant traffic and travel we observed several weeks ago as delta concerns grew.

That means stocks in the airline, casino, cruise and energy industries, which have faltered the most over the last three months, could lead the way into the latter part of 2021. Airline stocks are, on average, down 25% from their highs, cruise lines and casinos are down anywhere from 15% to 45% and the average energy stock is nearly 20% off its year-to-date highs.

With signs that the spread of delta is slowing, we’ll be watching for the reopening trade to pick up. If this happens, we should see a broadening trend away from technology’s dominance as markets continue to march higher.