Last week US equity markets posted their worst weekly performance since President Trump took office nearly two years ago. The follow-through on the broad-based trade lower was fueled by several themes that received a degree of confirmation from last week’s economic calendar and corporate results. The resultant trade took both the S&P 500 (-10%) and Nasdaq Composite (-12%) into correction territory. The Dow Industrials (-8%) have managed to perform marginally better in the sell-off than the Nasdaq in particular.
The Nasdaq’s outperformance to the downside underscores the rotation out of Large Cap Tech that first became apparent eight weeks ago.
In many respects, Facebook (FB) epitomizes that rotation. From the end of July through the end of last week, FB has lost 33% of its stock priced based value. However, FB is not alone. Intel (INTC) has given up over 26%, and even Google parent Alphabet (GOOG) has lost nearly 16%. Given the weighting of these mega-cap tech titans and their steep decline in recent weeks, the outperformance by the Nasdaq to the downside is entirely understandable.
Growth is suddenly no longer the darling of Wall Street – or so it would appear.Value investing, in the form of defensive names and dividend payers, has once again become attractive in recent weeks. The Dow Jones Utility Average since August 1st, for example, has traded fractionally higher.
Last week’s economic calendar provided a mostly constructive backdrop for investors. New Home Sales were slightly weaker than expected at 553k for September. The EIA Petroleum Status Report reflected a gain in crude inventories (6.3M) for the week ending 10/19 – exasperating concern that demand is not keeping up with supply. Durable Goods Orders for September were 0.8% – beating consensus calling for a modest contraction of 1.5%. The initial GDP reading for Q3 was stronger than expected (3.5% vs. 3.3%) and Real consumer spending was significantly stronger than expected at 4.0% versus 3.3%.
This weeks calendar, outlined below, should provide additional color on the rate of recent economic expansion. Personal Incomes and Outlays are reported this morning. The EIA Petroleum Status Report is due out Wednesday. Thursday we receive jobless claims and the ISM Mfg. Index. On Friday, the monthly Employment Report for October.
As I have discussed in recent notes and interviews, my sense is that the current equity market sell-off has compressed valuations and in the process has begun to afford investors with greater value once again. Additionally, as earnings season has mostly thus far illustrated, Q3 earnings continue to beat consensus by a healthy margin (62%). The economic data we continue to receive will act to support investors willing to buy when there is blood in the street.
Kenny’s Commentary In the Media:
REUTERS: Wall St. rebounds, dollar gains as euro swoons on Draghi
Reuters, October 24, 2018 by Sinéad Carew
REUTERS TV: U.S. markets poised to rebound with buybacks coming next week–with Fred Katayama
Video: Thursday, October 25, 2018 – 04:22
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