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The stock market is experiencing a slow motion decline with pockets of stocks down by 20% or more

The stock market is experiencing a slow motion decline with pockets of stocks down by 20% or more

Trading on the floor of the New York Stock Exchange.

Source: NYSE

The landmines for the markets are increasing. Seasonal weakness is combined with continued uncertainty about the impact of the delta variant on consumer behavior, high labor and material costs affecting pricing and delivery of goods, and poor data out of China.

While the S&P 500 is still about 1% off its heights, these landmines are taking their toll on major sectors of the market.

“In the last several months, most stocks have fallen more often than they have advanced — signs of a weakening of the market condition,” CFRA’s Sam Stovall said in a recent note to clients.

Other strategists have also noticed this difference.

“As the stock market reaches new heights, the divergence in the downtrend line suggests that we may be approaching a peak,” Guggenheim’s Scott Minerd said in a recent tweet. “In the past, such a divergence has indicated that the market is vulnerable to a sale.”

The 20% decline club is getting bigger

About 15% of the big-cap S&P 500 is more than 20% below 52-week highs, but much larger shards in the midcap and small-cap universe have dropped 20% or more — these groups are less technically focused and more susceptible to a economic downturn:

Slow motion deterioration
(percentage that is 20% or more below heights of 52 weeks)

  • S&P 500 15%
  • S&P Midcap 30%
  • S&P Small Cap 48%

The Covid-related weakness affects sectors associated with the reopening, such as industry and retail.

“This phase of the pandemic poses downside risks to the economic recovery, including for inflation components that are more sensitive to the disruption of demand for services,” Blerina Uruci of Barclays wrote in a recent note to customers.

Industries / materials
(% discount on 52-wk. heights)

  • American Airlines 26%
  • FedEx 20%
  • Dupont 20%
  • PPG 18%
  • Caterpillar 17%
  • Stanley Black & Decker 17%
  • Lockheed Martin 14%
  • 3M 12%

Dealers
(% discount on 52-wk. heights)

  • Nordstrom 41%
  • Gap 36%
  • Abercrombie 24%
  • Kohls 19%
  • Ross Stores 16%

The downturn in China – particularly the decline in retail sales due to Covid problems – is dramatically affecting luxury retailers, many of which are based in Europe.

Luxury retailers
(% discount on 52-wk. heights)

  • Dry 21%
  • Wallpaper 20%
  • Richemont 17%
  • Moved 15%
  • LVMH 14%

Supply chain and work problems affect the ability of some home builders to fully deliver orders.

House builders
(% discount on 52-wk. heights)

  • Desk 26%
  • KB Home 21%
  • DR Horton 17%
  • Lennar 11%

Concerns about drug price controls from the Biden administration have also affected Big Pharma in the last few weeks.

Big Pharma
(% discount on 52-wk. heights)

  • Eli Lilly 14%
  • Bristol Myers Squibb 11%
  • Merck 11%
  • Johnson & Johnson 8%

An eruption or collapse?

Most strategists, including Dubravko Lakos-Bujas from JPMorgan, remain bullish, but even Lakos-Bujas admits that it is very difficult to read the economic tea leaves. “Given the unique nature and impact of the pandemic, the current cycle is more difficult to analyze relative to historical cycles,” he said in a recent note to clients. “This cycle is essentially an overlay of two intertwined cycles – a Covid cycle and a regular business cycle (incl. Labor, capex, inventory).”

Why do so many analysts and strategists remain bullish? It is all based on the theory that the delta variant will prove to be a declining force and that earnings will not fall significantly. “As the delta variant eases, we expect these concerns to subside, leading to a much stronger 4Q21 holiday season (as opposed to last year’s disappointment of the holiday season) and an increase in cross-border activity from still depressed levels,” said Lakos- Bujas.

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