The Unusual Bullish Trend of Some Cyclicals
A bullish trend is a term used in finance and economics to describe a market or security that is showing signs of rising prices or positive sentiment among investors. It implies that the market or security is expected to continue to increase in value over time. A bullish trend is often associated with optimism, confidence, and an overall positive outlook for the economy or a specific industry. In a bullish market, investors tend to be more willing to take risks and invest in stocks or other assets that are expected to appreciate in value.
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Cyclical Companies Hitting 52-Week Highs Despite Economic Slowdown
When we take a closer look at the stock market, we may find some well-known cyclical companies whose stocks are reaching 52-week highs despite the current economic slowdown and banking system issues that emerged in March. Companies such as AutoZone (AZO), Booking Holdings (BKNG), Clorox (CLX), Coty (COTY), Decker’s Outdoor (DECK), ELF Cosmetics (ELF), General Electric (GE), Lennar (LEN), McDonald’s (MCD), Oracle (ORCL), and Nvidia (NVDA) have all hit fresh 52-week highs this week. These companies engage in various activities ranging from offering luxurious vacation packages to selling industrial equipment, fashionable boots, and cosmetics to consumers. They are cyclicals whose financial fortunes are tied to the economic outlook, which appears mixed at best this year and recessionary at worst.
The Reasons Behind the Bullish Sentiment in Cyclicals
Pause On Interest Rate Hikes
Despite this seemingly bizarre bullish trend, Wall Street experts suggest that there are various factors driving it. One of the primary drivers is the belief that the Federal Reserve’s pause on interest rate hikes could boost the economy, which has cooled due to aggressive rate hikes since 2022. This pause could provide some relief to the economy, and in the second half of the year, cyclicals could experience an uptick in their sales and profits. Investors are likely buying these stocks in anticipation of that happening.
Why Market Professionals May Have to Chase Stocks Despite Lack of Belief in the Market
Sevens Report Research Founder Tom Essaye agrees with the Fed pause narrative, but he thinks there are other factors at play. According to him, market professionals expect stocks to drop, which means the “pain trade” is higher in the short term as under-allocated advisors and investors begrudgingly chase stocks. The “pain trade” refers to the possibility that some investors who have not allocated enough of their portfolios to stocks may have to buy stocks at higher prices to avoid underperforming, as stocks continue to climb steadily. This could be a painful experience for such investors as they are forced to chase stocks and pay higher prices than they would have preferred.
Underweight stocks
The latest Bank of America fund manager survey shows an outsized 29% of respondents are underweight stocks, indicating a lack of belief in stocks and a bearish outlook on risk. However, if stocks continue to climb steadily, these same large investors may be forced to buy stocks to avoid underperforming, thus driving the stock prices higher. This is especially true for cyclical names that tend to do well at the start of an economic re-acceleration.
Why a Sounder Financial System is Supporting the Narrative of a Short Economic Slowdown
Additionally, Essaye notes that stocks are benefiting from the narrative of the economic slowdown being short in duration due to a sounder financial system. He explains that we are exiting a period of historically massive economic stimulus, which is very different from the past two economic slowdowns that were caused by asset bubbles popping, such as tech stocks and houses. This implosion of asset values created the slowdowns. However, this time, there was no asset bubble to pop.
The Bottom Line
In conclusion, the bullish trend in some notable cyclical stocks can be attributed to the Federal Reserve’s pause on interest rate hikes, investors’ anticipation of an uptick in cyclicals’ sales and profits in the second half of the year, market professionals chasing stocks, and a more sound financial system. These factors are driving stock prices higher, especially cyclical names that tend to do well at the start of an economic re-acceleration. Therefore, investors should keep an eye on these cyclical stocks and consider including them in their portfolio.
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