A handful of the largest Large Cap stocks that propped up the stock market last year have been knocked down hard so far this year. Without their leadership, the overall stock market has also stumbled badly so far this year. Last year, the market-cap-weighted S&P 500 edged down 0.7%, while the equal-weighted S&P 500 fell 4.1%. So far this year, the former is down 7.5%, while the latter is down 8.4%. The total market capitalization of the S&P 500 fell by 1.9% last year and by 7.4% so far this year.
Needless to say, investors accumulated huge profits in the FANGs last year as follows: Facebook (up 34.1%), Amazon (117.8), Netflix (134.4), and Google (46.6). So far this year, they are down a lot through Wednesday’s close (-8.8%, -13.9, -6.8, and -7.5, respectively). All that profit-taking has raised lots of cash for the profit-takers. Their problem now is where to put it. Let’s see how long they can stand to keep it in cash, with yields likely to stay low if the recession fears that seem to have sparked the latest selloff persuade the Fed to postpone another rate hike for quite a while.
While Joe and I recently have acknowledged that the technical picture has turned very grizzly very quickly this year, we are somewhat encouraged to see that the Bull/Bear Ratio compiled by Investors Intelligence dropped from 1.10 last week to 0.80 this week, as Debbie reports below. Readings below 1.00 often have set the stage for big rallies.
It could be different this time, or it could take longer this time. The problem is that the market needs some leadership to the upside. Right now, it has plenty of it to the downside from last year’s falling leaders. On Thursdays, Jackie and I tend to focus on the S&P 500 sectors. Investors can’t seem to find any bullish candidates to lead a sustained charge to the upside right now. They’ve all been charging to the downside so far this year.
The Consumer Discretionary sector’s storefront retailers have been disrupted by their online competitors. Only one such competitor really matters, and now Amazon is selling at a discount to the purchase price paid by investors who bought their shares since late October. Consumer Staples stocks aren’t cheap, selling at 19.5 times forward earnings and a PEG ratio of 2.7. They’ve been boosted by lots of M&A activity. However, many of the multinationals in the sector face earnings headwinds as a result of the strong dollar.
As Jackie and I have observed since late last year, while the forward earnings of the Health Care sector is at a record high, the drug makers are under attack by politicians upset by hefty increases in drug prices. The IT sector has a tendency to disrupt other businesses as well as its own kind. The Cloud is doing that right now to both hardware and software IT companies, and now some of the Cloud providers are losing altitude as profit-taking hits them too. The market for smart phones seems to be saturated, which is weighing on widely owned Apple.
Energy, Materials, and Industrials all are challenged by the weakness in global economic growth and plunging commodity prices. Financials should be performing better now that the Fed has widened their interest margin, but there is a contagion of fear about another 2008-style financial contagion.
These all are very depressing developments, and all are widely Known Knowns. There are no Black Swans in this flock. Investors who’ve started the New Year by taking their profits out of last year’s winners, as well as out of the winners since the start of the bull market, must now decide whether to stay in cash in the belief that a bear market is underway. In our view, this latest panic attack will soon pass as investors become more confident that neither the US economy nor profits are falling into a recession.
Dr. Ed Yardeni
is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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