FANG has been the name of the game for some time now – put your money in Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL), and you’ll come out ok. That, though, seems set to change now, with the grouping falling yesterday after two of its frontrunners fell short of analyst expectations, taking a big chunk out of the NASDAQ index. Yesterday, four of the five tech-driven companies, Facebook, Amazon, Netflix and Alphabet (Google’s parent) ended down, giving the NASDAQ its worst 3-day streak since March. Of course, its Facebook responsible for a huge chunk of the losses, toppling 20% in last Thursday’s trading. It wasn’t only Facebook, though, that disappointed The Street. For the first time in 5 quarters, the video-streaming powerhouse missed the new subscriber figure expected by analysts. After the report’s release, the stock collapsed 5%, making its aggregate month-to-date losses 13%. And investment banks are seeing this as part of a larger trend.
Morgan Stanley is now projecting a move back to value stocks, after years and years of growth stocks fueling the market rally. Saying it loud and clear, the bank wrote a note to investors stating, “We think the turn is in,” concomitantly projecting a regression to the mean in the duality of growth vs. value. Value in many respects refers to the margin of safety a stock possesses, or as small a disparity as possible between market cap and the worth of a stock’s equity on the books. With the rally of recent years, so many investors have booked on astronomic growth and tech players totally refashioning and reshaping the investment landscape. Take for example Amazon, which trades at a PE (TTM) of 223.80. It’s been one of the highest- flying stocks in the market in the last 2 decades, disrupting whole industries far and wide. The PE of the S&P 500 is about a tenth of that. While Amazon’s earnings have been on the uptick, there are scores of companies trading at far lower multiples, meaning that with external shocks, from trade wars to inflation to the fear of a growing budget deficit and even recession, we could be in for a cold spell.
Morgan Stanley left no room for error. Without mincing any words, the investment bank wrote to clients: “With Amazon’s strong quarter out of the way, and a very strong 2Q GDP number on the tape, investors were finally faced with the proverbial question of ‘what do I have to look forward to now?’ The selling started slowly, built steadily, and left the biggest winners of the year down the most. The bottom line for us is that we think the selling has just begun and this correction will be biggest since the one we experienced in February.”
The operative question for many is with Trump touting the huge GDP growth figure, how much of it is in fact sustainable. Fueled by borrowing, in essence, the tax cut could be little more than kicking the can down the road! News breaking yesterday that Trump hoped to grant a $100 billion tax cut that would cut capital gains taxation, meaning that even less money would enter the government’s coffers. The U.S. government now has a $21 trillion debt to its name. To bring that into perspective, the U.S. GDP in 2017 was shy of $20 trillion, $19.485 billion to be exact. With Trump having once promised that he could cut the U.S. deficit to zero in eight years’ time, that suggestion seems all the more ludicrous now. “We’ve got to get rid of the $19 trillion in debt,” Trump claimed before being elected. Asked how, he said that through cutting better trade deals. Now, with mid-term elections imminent and with Democrats having a reasonable chance of retaking the House, we have to see how all macro developments develop, in particular, the effect they have on the market.
Before you know it, we could see the markets turn their backs on Trump’s quixotic plans, and we could even see a rebellion from within, i.e. Republicans joining ranks with the Democrats if the voter backlash is strong enough. As of now, Trump has not been winning the trade war. Having prior called the EU a foe, he reached an understanding of sorts with the continental bloc, but we still have no certainty yet of what will be the fate of carmakers, at the nexus of the trade war.
Add to that the implications of a report yesterday in the NYTimes DealBook that companies by and large are planning to pass on additional tariff-related costs to consumers, and inflation could spike; that of course is coupled with certain companies like GM that don’t have that pricing muscle, and what we’re getting is either consumers getting hurt or companies’ bottom lines getting hurt, both ultimately reflected in stock prices. With that said, some are noting that passing prices on in not sustainable in the long run. Yardeni Research Chief Investment Strategist, Ed Yardeni, stated, “It’s been very hard for companies to pass costs through to prices for many years,” adding, “The thing about tariffs is that they make a very good excuse: Blame it on Trump.” How much blame Trump will get will be seen in the mid-terms. But, the Times argues, with wages showing growth, big ticket items could still be in reach, consumers buying up merchandise before expected price increases.
Market Summary: All of the major indexes fell, the blue-chip Dow off 0.57%, the S&P 500 shedding 0.58%. The NASDAQ fell a full 1.39%.
Economic Calendar: Today’s calendar will be jam-packed, featuring four different releases at 8:30, before the opening bell: the Employment Cost Index, Personal Income, Consumer Spending and Core Inflation. Core inflation is carefully watched by the Fed as an indicator of overall economic health. At 9:00 the Case-Shiller Home Price Index, with the Chicago PMI coming out at 9:45, only to be followed by the Consumer Confidence Index at 10:00.
Hot Stocks: TXRH, AKS, ILMN, ALSN, CHGG, SANM
Have a great trading day!