Market Leadership Shifts As Growth Gap Widens (Plexus Corp)

The Broad Market Index was down 0.77% last week and 72% of stocks outperformed the index. It was a light week for financial statement updates from the third quarter with only 61 companies reporting; lifting the update to 91% complete. These are mostly companies with fiscal years ended September (annual financial statements have a later filing deadline). Still to be seen is the larger population of companies with fiscal quarters ended October and they (mostly retailers) will report financial statements in the next two weeks.

Evidence is accumulating that we are in a growth leadership shift as industrial companies record improvements and technology companies record declines in growth. The growth gap between industrial (and commodity) companies and technology companies has widened to the largest ever.

The virus has exaggerated both sector trends and pushed many companies into insolvency. Emergency cost-cutting responses are very frequent now and especially among stressed companies. By sharply reducing costs and capital expenditures these stressed companies are adding to the economic and labor force weakness.

Higher Market Volatility Awaits

The effect of this leadership shift with companies in crisis mode is overall reduced capacity both existing and planned. Those decisions also extend the time required to recover capacity so that when demand recovers with capacity reduced, commodity prices will move up. Keep in mind, it is very early in the cycle trough and shares are broadly extended now. Historically, cycle troughs are associated with higher market volatility. Stay tuned as there will be plenty of future opportunities to identify the stronger companies.

Risk-Taking As Asset Values Increase

Meanwhile, there has been a substantial increase in risk-taking as the huge increase in asset values (and the associated decrease in interest rates to new historical lows) has pushed back bad memories. Sales of houses and autos are high and rising. These trends are now unusually extended and both greatly exaggerated by the virus.

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