Market Insights

Stocks inched lower last week, but the real story is the emergence of a new regime dominated by the next generation of technology firms.

The S&P 500 fell 1 percent between Friday, December 4, and Friday, December 11. The Nasdaq-100 and Dow Jones Industrial Average, both dominated by large and established companies, also declined. Meanwhile, a whole universe of newer companies flew higher.

Airbnb (ABNB) and DoorDash (DASH) upsized their initial public offerings and still had enough demand to rally more than 60 percent. Smaller deals including C3.ai (AI), AbCellera (ABCL) and Certara (CERT) also spiked. Across the board, the focus is on artificial intelligence, virtualization and digital transformation. A whole new stock market is being born.

The economic picture remained murky because of coronavirus. Initial jobless claims spiked much more than expected as the pandemic starts shutting down businesses again. But on the other hand, investors are hoping for normalcy to return now that Pfizer (PFE) is distributing its vaccine.

Zillow, Stich Fix, MongoDB

Aside from the IPOs, last week was also notable for the rallies in other newer technology-based companies:

• Stich Fix (SFIX) surged 69 percent after the AI-powered clothing company crushed estimates. Its customer base also grew faster than expected to 3.8 million. The nine-year old upstart uses a combination of algorithms and data science to personalize apparel. SFIX’s $6.3 billion market capitalization is almost twice that of Macy’s (M).
• Zillow (Z) rose 18 percent, continuing its push to new record highs after a strong quarterly report on November 6. It’s a key gate-keeper for real-estate data as a new housing boom takes hold. Z’s $29.6 billion market cap would rank it in the top half of the S&P 500. It’s even bigger than Simon Property Group (SPG), America’s largest shopping-mall owner.
• MongoDB (MDB) rallied 22 percent after beating guidance. The 13-year old cloud-computing innovator has gained more than 1,300 percent since its IPO in October 2017.

Disney Goes Digital

New companies weren’t the only ones to benefit from digital transformation. Walt Disney (DIS) more than doubled the long-term growth targets for its Disney+ streaming service after reaching its earlier target three years early. The company is planning 15 new series and 15 new films. Including Hulu and ESPN+, DIS expects to have as many as 350 million digital subscribers by 2024.

The news lifted DIS 14 percent, its biggest weekly gain in 11 years. The stock also closed at a new all-time high above $175.

Energy was the only major sector to climb last week as investors continued to look for the economy to recover from the pandemic. Steelmakers, biotechnology and Chinese Internet stocks were also strong. Semiconductors and real estate investment trusts performed the worst.

S&P 500 Near 3700

The S&P 500 briefly traded above 3700 last week before pulling back. It formed a so-called outside candle on Wednesday, a potential reversal pattern. That may suggest it’s due for a pause after breaking out to new record levels last month.

The index’s problem isn’t bearish sentiment. It’s actually a bullish problem: Investors are so positive on stocks that they’re abandoning the largest companies like Apple (AAPL), Microsoft (MSFT) and Amazon.com (AMZN). Instead they’re buying smaller up-and-comers like Snowflake (SNOW) and Snap (SNAP), which aren’t in the main indexes. Keep reading Market Insights for more on this shift toward newer companies because it could remain a key trend well into next year.

Tesla Joins the S&P 500

Speaking of new companies, Tesla (TSLA) is joining the S&P 500 in a week. It will be the largest index addition ever, reducing the weighting of other stocks. That could drag on the broader market as investors trim other stocks to buy TSLA.

This week features several important events, including a Federal Reserve meeting. It’s the last full week of the year, followed by Christmas and the New Year.

Wednesday has the following items:

• Retail sales for November, issued by the Commerce Department
• NAHB’s homebuilder sentiment index for December. It’s been a record levels recently because of strong demand for houses.
• Weekly oil inventories from the Energy Department. They’ve recently shown the oil glut worsening.
• Fed policy statement and press conference. Central bankers may start buying longer-term bonds to depress longer-term rates. That could be potentially bad news for financials.

Thursday has the following items:

• Housing starts and building permits for November, issued by the Commerce Department.
• Initial jobless claims for last week.