The market is getting whipsawed by negative news regarding the coronavirus and potential profit and supply chain disruptions, at the same time unemployment rates and interest rates are at record lows. While the focus is largely on the public health disruptions, eventually the market will again focus on the economy and its impact on profits and growth. Research by MacroRisk has shown that different companies have different responses to economic variables, and that the same set of economic conditions might be favorable for some companies and unfavorable for others. The most valuable, and seemingly the most turbulent, stocks appear to be those on the NASDAQ. In this report, we ask what the economic climate might be for NASDAQ stocks when the social angst calms down and investors care about profits, costs, and more mundane economic factors of investing.
Using the patented and proprietary tools available on the MacroRisk Analytics® platform, we will show the distribution of NASDAQ stocks that are currently expected to be suitable in the current economy to those stocks that are not. This can help investors and financial advisors understand what portion of stocks is expected to benefit from current economic conditions and which portion is not. It will help to answer the following question: what portion of stocks does the economy provide tailwind for, headwind for or is neutral for? This, in turn, can assist in understanding where the overall economy currently stands.
To demonstrate this, we use MacroRisk’s “economic climate rating (ECR)” based on its patented technology. This powerful rating measures the expected impact of the current economic climate for individual assets (including stocks, funds, and many others) over the next six to 12 months. The ECR is a five-star scale where one indicates substantial economic storms in the forecast and five indicates positive tailwinds and a favorable climate.
As of 3/9/2020, the average economic climate rating is 2.2 for covered NASDAQ stocks (those with at least three years of trading history). Overall, the forecasted economic climate is somewhat unfavorable for NASDAQ stocks. On the other hand, there are some NASDAQ stocks which seem to have their corporate sales perfectly trimmed to catch the economic breezes, and they receive a 5-star rating.
The distribution of the economic climate rating is presented in the following graph. The graph below shows that there are more of 1- and 2-star stocks than 4- and 5-star stocks as of 3/9/2020.
The economic climate rating is based on each stock’s unique response to key 18 economic factors in conjunction with the current values of those factors. The graph below shows the current economy expressed as “z scores”, that is in a way that adjusts for different magnitudes and different volatilities. In the chart below, each bar shows the current economic value compared to its historical values. The economic climate rating is computed using the current values and doesn’t include additional economic forecasting.
Given that there are more stocks for which the current economy is expected to not be suitable than those for which it is, investors might consider a more defensive approach to their portfolios. This analysis assumes that the economic factors will continue in their current directions. Alternatively, investors may choose to focus on those where the economy is most favorable.
The next table shows the top 10 NASDAQ stocks in terms of their economic climate as of 3/9/2020. In other words, these are the 10 stocks that are believed to be most undervalued according to the 18 macroeconomic factor MacroRisk model.
MacroRisk Analytics® research is available on Interactive Brokers through our “The Economy Matters®” reports.
MacroRisk Analytics also has a selection of proprietary analysis tools, including the economic climate rating discussed in this post, that use macroeconomic variables to provide information on tens of thousands of stocks, mutual funds, exchange traded funds, and other traded assets. Click here to see how MacroRisk Analytics can help you.