Newton’s Law and Stock Market Momentum
I remember learning in middle school about Sir Isaac Newton’s first law of motion. I took those classes during the height of the Apollo space program, a bygone era when kids were taught basic science at an early age.
Newton’s first law stipulated that an object at rest stays at rest and an object in motion stays in motion unless acted upon by an unbalanced force. The swinging spheres of “Newton’s cradle” were used in class as a fun way to illustrate the concept.
Expressed in Wall Street parlance, Newton’s first law of motion means: the trend is your friend.
The COVID Delta variant, hotter inflation…no “unbalanced force” seems able to stop the stock market’s forward motion, as investors shake-off their fears to focus on positive fundamentals.
Chief among those tailwinds are ultra-dovish monetary policy and booming corporate earnings. Amid low interest rates, robust earnings growth, and economic recovery, you’ll do well to remember that the trend is indeed your friend.
Below, I pinpoint a technological trend that offers outsized investment gains. It relates to the space race of the 21st century. But first, let’s look at the kinetic forces that are driving the markets.
The Federal Reserve ended its two-day policy meeting Wednesday by leaving rates anchored to rock bottom levels, as expected. However, in its typically cryptic fashion, the Fed hinted that policy changes could be on the way soon.
On Wednesday, the Dow Jones Industrial Average fell 127.59 points (-0.36%), the S&P 500 slipped 0.83 points (-0.82%), and the tech-heavy NASDAQ jumped 102.01 points (+0.70%). The small-cap Russell 2000 rose 33.12 points (+1.51%). In pre-market futures contracts Thursday, stocks were trading mostly higher.
Investors are generally encouraged by earnings beats from Apple (NSDQ: AAPL), Alphabet (NSDQ: GOOGL), and Microsoft (NSDQ: MSFT), although concerns linger about slowing demand and the persistent chip shortage.
Asian stocks mounted a comeback Wednesday, as China’s market regulators made conciliatory statements to assuage investor concerns about a government crackdown on the tech sector. Shares in the region slumped earlier in the week after Beijing took harsh measures against some of the country’s biggest technology names, to rein in their growing social clout and market concentration.
Adding fuel to the market’s momentum is the torrid pace of home price growth, which continues to smash records. In May, home prices on a nationwide basis were 16.6% higher than in May 2020, the highest reading since the S&P CoreLogic Case-Shiller Index started keeping the data more than 30 years ago.
The latest numbers were released on July 27 (see chart).
The backdrop of positive economic data is lifting optimism on Wall Street. Among the total 10,570 analyst ratings on stocks in the S&P 500, 57.1% are Buy ratings, 36.6% are Hold ratings, and 6.3% are Sell ratings, according to data from research firm FactSet.
The energy (65%), health care (63%), information technology (62%), and communication services (62%) sectors have the highest percentages of Buy ratings, while the consumer staples (43%) sector has the lowest percentage of Buy ratings.
Changes in personal and professional behaviors wrought by the coronavirus pandemic are driving technology stocks ever higher. But the tailwind of disruptive innovation isn’t dependent on the economic cycle.
The cloud, artificial intelligence, electric and autonomous vehicles, pilotless aircraft, virtual/augmented reality, the Internet of Things…all of these technologies represent unstoppable trends that transcend a single corporate quarterly report.
The final (profitable) frontier…
At the top of this article, I alluded to NASA’s Apollo program, an heroic human effort that captivated me as a youngster. Today, we’re witnessing a new space race.
In recent weeks, billionaires have been rocketing into the heavens, kicking off a public obsession with space travel reminiscent of the 1960s moon shot.
In the space race of the middle 20th century, Russia in 1957 launched Sputnik, the first artificial earth satellite. The event shocked America and catalyzed the country’s resolve to invest in science and beat the Soviets.
The U.S. got to the moon first in 1969 and along the way, our scientists generated a variety of technological breakthroughs that boosted our military and filtered into the consumer sector. America once again faces a Sputnik moment.
Richard Branson and Jeff Bezos already have made well-publicized journeys into outer space; even the eccentric Elon Musk is preparing to don a space suit.
The celestial competition between the world’s super-wealthy is helping turn a certain “miracle metal” into the technology investment play of the century.
You’ve probably never heard of this ultra-versatile metal, but space missions would be grounded without it. Click here to learn more.
John Persinos is the editorial director of Investing Daily. Send your questions or comments to firstname.lastname@example.org. To subscribe to his video channel, follow this link.