Stock of the week: After Friday’s sell off, it’s time to go shopping
Stock markets ended last week with an almighty sell-off after markets shuddered at the news that a new, heavily mutated Covid variant named Omicron had been found that could potentially disrupt the global economic recovery. Markets fell across the world, and risk assets sold off sharply. The S&P 500 fell more than 2% at the end of last week, and the Vix index, Wall Street’s fear gauge, rose to its highest level since March. However, in early trading on Monday, the signs are that markets may rebound, and Friday’s sell off was exacerbated by the shortened trading hours because of the Thanksgiving holiday and low liquidity in financial markets. Sentiment could also be helped by the World Health Organisation calling for a balanced response to the Omicron news over the weekend and asking people and governments not to panic.
Weighing up the threat posed by Omicron
At the start of the new week, there is still little known about this variant and how it could impact vaccine effectiveness and virus transmissibility. There is still a vacuum of information about Omicron, which is being filled by speculation: some analysts think that Friday’s sell off was a massive over-reaction, however some are remaining cautious because we know so little about this new variant. We remain somewhere in the middle; however, the market sell off came at a decent time for financial markets. Firstly, major global stock indices were ripe for a sell off, secondly, with valuations for some of the world’s largest stocks falling to slightly more palatable levels, it could help spur the start of the Santa Rally as we move into December later this week.
We believe that major sell-offs can offer good opportunities for traders to buy names that we think will do well in the short to medium term. We have listed the names that are on our list at the start of this week, and three sectors that we will be watching closely as they may benefit from the post-Omicron bounce back.
Retail: Black Friday was a mixed bag in the US this year, especially compared to the record-breaking sales recorded in the UK. In the US, there were fewer deals available due to supply concerns, although there was a 48% increase in store visits this year compared with 2020, it still lagged 2019 levels. Black Friday spending also fell in the US this year, with online spending expected to come in around the $8.9- $9.2bn mark, which is the low end of expectations, according to Adobe Digital Economy Index. However, this does not mean that the US consumer is not doing their bit for the US economy, merely it suggests that fears about the supply of goods has pushed people into buying for the holiday season earlier than ever this year. Adobe also reported that daily online sales reached $3bn for 18 days in November, with spending up more than $2bn on the other days. Due to the uncertainty caused by Omicron, we like the high quality, well-run retail names that can weather any storm that Omicron throws at the global economy. For example, Walmart, Target, Amazon, Lowes and Home Depot. Interestingly, Target has massively expanded its buy online and pick up on the curb side offering, rather than have customers venturing into stores. This has proved to be extremely popular in recent weeks and could help Target to weather any future lockdowns caused by Omicron. Overall, we prefer names like Target that are already putting into place Covid-friendly options that could help them deal with another Covid outbreak. Overall, we think that consumer spending looks strong this holiday season, and for companies that have robust supply chains and a significant online presence, then what happens with Covid and future potential lockdowns may not harm their bottom lines. We also think that news about Omicron could help Amazon’s share price. The online giant fell more than 2% on Friday, and its performance has been choppy in recent months. Due to this, Amazon could be top of the bargain-hunters’ shopping lists at the start of a new week.
High quality banks: JP Morgan’s stock price fell 3% on Friday, more than the S&P 500. Goldman Sachs also saw its share price drop 2.5%. Interestingly, rising market volatility is good news for both of these stocks, due to their trading activity, and for GS in particular. There are also reasons to be optimistic about ] JPM: higher retail spending, which is good for JPM’s credit business, and the recent rise in Treasury yields, which could help profit margins in the weeks and months to come. JPM’s stock price has backed away from its record high, thus, we think that traders will gobble up this stock if Omicron fears have calmed down slightly at the start of the new week.
Tech names to watch: As we mention above, while there is a good chance that Friday’s price action was an over-reaction to the Omicron news, we still do not know that much about this new variant and traders need to be careful. This is why we expect gains for some big tech names at the start of this week. We think that cloud companies and cyber security could be the stand-out winners as there is an increasing risk that Omicron could lead to a shift back to working from home. In the cloud space we like Microsoft, and the Nasdaq-listed Nice. In Cyber security, we will be watching Palo Alto Networks and CyberArk Software. While some of you may baulk at the valuations of these stocks, we think that Friday’s sell off could make these richly valued companies slightly easier to swallow. We also think that they are a good bet in this very uncertain environment that we, yet again, find ourselves in.