Monday, 17 September 2018 18:47

FAANG Moves - July 2018 Review

Gross Domestic Product topped 4% in July and likely recorded the highpoint looking forward. A rolling correction worked through the market but with price resilience. Trade worries couldn’t overrule strong corporate earnings during the month. S&P500 gained almost 4%...the DOW up over 1,000 points had its best month since January…European equities were up over 4% and now positive for the year…and the 10-year US Treasury hit a 3% yield.

Retail sales grew 6.6% year on year. Both inflation and employment are near the Fed’s mark so interest rates most likely will continue to be ratcheted up 25bps per quarter. Almost 90% of companies beat expectations and +20% is still the pace for full year EPS.

S&P 500 July +3.60% YTD +5.34% DOW July +4.71% YTD +2.82%

NASDAQ July +2.15% YTD +11.13% Russell 2000 July +1.69% YTD +8.81%

 

Market Background

Elite names were exposed with sharp pullbacks fostering discussion on whether long favored growth was giving up leadership to value. Concentration was exemplified by the top 5 issues in the S&P500 representing the same value as the bottom 270…The Technology group, after significant correction, rallied on the last trading day on the heels of Apple earnings prospects changing the view.

FAANG Impact

FAANG stocks (Facebook, Amazon, Apple, Netflix and Alphabet) are all down from their most recent highs with Facebook now negative for the year -1% and -20% from the $217.50ps high. Amazon is +55% YTD with a modest pullback of -2.50% from the $1,863.61ps top. Apple’s performance is at +12.59% YTD, with just a small decline of -2.34% from the $194.82ps level.

Netflix YTD is +84.60% but like FB has had a large reversal -15.28% from the $418.65ps pinnacle. Lastly, Alphabet is +18.54% YTD and is -2.67% from the $1,285.50 high. Facebook and Netflix clearly faltered the most and helped to call into question the continued overweight in the space. Other leadership names to pullback in July reinforced the negative Tech sentiment…Intel -3.23%, Tesla -13% and Red Hat -5.10%.

Additional

Autos reported lower sales for July…Ford, GM and Fiat Chrysler reduced full-year earnings by a combined total of $3 billion. Sales at Ford, -3.1% for July, with retail sales down -10.4% largely due to a decline in passenger cars of -28%...high-margin pickup trucks were +10.2%. GM stopped reporting monthly sales.

Automakers have to absorb most of the headwinds from commodity prices in the short-term. However, they can fine-tune over time…by raising prices. Certainly this may lead to lower sales numbers industry wide but GM, Ford, and many of their competitors have the flexibility to reduce production while remaining profitable.

Looking Ahead

Growth clearly separates the U.S. from the rest of the world, insulating against the impact of tariff outcomes. The Fed shifting from accommodating toward higher rates (quantitative easing to tightening) is the other important issue to factor into market direction as we push toward mid-term elections. July revealed the quickness of downdrafts in elite stocks which had been market leaders.

The correction has been largely expressed and a trading zone will likely be maintained through the rest of the summer.

 

GN&Co

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