The WMA Weekly Market Wrap v.180911

September 11, 2018

Shortened Week, Weaker Market

Domestic stocks declined in the Labor Day-shortened week ending Friday. In a reversal of recent trends, value stocks outperformed growth shares as the tech-focused Nasdaq lagged. Nevertheless, the value-oriented energy sector performed worst within the S&P 500 as oil prices fell sharply in response to rising U.S. inventories and concerns about demand from emerging markets. Still, the Russell 1000 Growth index outperformed the Russell 1000 Value index in August by the largest amount since February 2009, according to Bank of America Merrill Lynch.

Technology stocks were also weak last week, while industrials outperformed. Trading volumes picked up as the summer vacation season came to an end, and traders observed that much of the increased buying and selling early in the week took place in individual stocks rather than ETFs and futures – suggesting fewer traders were making wholesale moves in and out of stocks based on macroeconomic events and other thematic factors. A generalized “de-risking” and moving out of equities seemed to resurface on Thursday, however.

Technology and Internet-related stocks suffered a double blow during the week. On Wednesday, shares in Facebook and Twitter fell after executives from the two social media giants testified before Congress about efforts to curb foreign interference in U.S. elections through their platforms. Chinese Internet stocks also continued to suffer sharp losses, weighing on sentiment toward the broader group. On Thursday, semiconductor shares fell sharply after analysts lowered their price targets on Micron Technology, and fears grew about slumping demand from China and supply chain problems resulting from rising trade tensions.

The tech news wasn’t all bad. Amazon followed Apple to become the second U.S. company to reach $1 trillion in market capitalization last week, reflecting the online retailer’s striking transformation from a profitless bookseller into a disruptive force of commerce. AMZN was up an incredible 73 percent YTD at its high last week, increasing in value by over $400 billion in eight months. To put this number into perspective, the increase in AMZN shares is greater than the capitalization of 495 members of the S&P 500 and is roughly the size of Walmart, Costco and Target combined. To put it another way, just the increase in AMZN’s value would rank it as the thirtieth largest GDP in the world; the increase is about the same as Norway’s GDP. The total capitalization of AMZN would rank it as the sixteenth largest country GDP, eclipsing the GDP of countries such as the Netherlands, Turkey, Saudi Arabia and Switzerland. All this on (2017) revenues of only $177 billion, earning about $3.03 billion. For comparison, Walmart had 2017 revenues of $485.9 billion and earned $14.7 billion. Its revenue would make WMT the twelfth largest country in the world by GDP.

In related news, Sen. Bernie Sanders is the latest politician to take a shot at Amazon. The Vermont independent Socialist introduced a bill aimed at taxing big companies whose employees rely on federal benefits to make ends meet. Mr. Sanders specifically targeted Amazon founder and leader Jeff Bezos, contrasting his vast personal wealth with the compensation of the companies’ lowest-paid workers. President Trump, for different reasons, has also attacked AMZN. The markets have shrugged.

This month marks the tenth anniversary of the Great Financial Crisis. Twenty years ago last week, the search engine Google was incorporated as a company. Its parent firm, Alphabet, will perhaps be the next company to hit $1 trillion. It now has a market value of roughly $850 billion (see the chart below).

The U.S. trade deficit in goods with China and the European Union reached record highs in July. One factor: U.S. exports of soybeans fell sharply after the largest buyer, China, imposed retaliatory tariffs. Uncertainty about U.S. trade policy seemed to weigh on market sentiment generally last week. After falling apart the previous week, talks between Canada and the U.S. on a revised North American Free Trade Agreement appeared to make little progress. Meanwhile, traders braced themselves for the implementation of tariffs on another $200 billion in Chinese goods after the public comment period on the threatened tariffs closed on Thursday. Indeed, President Trump announced his plans to move ahead with these tariffs on Friday and threatened further action on another $267 billion if China retaliates. Altogether, the proposed tariffs would essentially cover all U.S. imports from China. In addition, reports surfaced that the Trump administration was next planning to set its sights on trade with Japan.

While evidence is mixed as to whether the trade dispute is taking a toll on the Chinese economy, signs are scant that it has had an impact on U.S. growth. The Labor Department announced on Thursday that initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 203,000 for the week ended September 1, the lowest level since December 1969, which was a very different time in that nearly 10 percent of that generation served in Vietnam, 550,000 in 1969 alone. The pace of hiring picked up in August, as nonfarm payrolls rose a seasonally adjusted 201,000 in August, the Labor Department announced Friday, a pickup from the prior month. American workers’ paychecks grew strongly and the unemployment rate held steady at 3.9 percent last month, showing ongoing strength in the labor market. U.S. employers have added to payrolls for 95 straight months, extending the longest continuous jobs expansion on record.

The economic data seemed to have little impact on stock prices, with traders appearing to accept that the wage inflation was not worrisome enough to provoke a faster pace of short-term rate increases by the Federal Reserve. The Fed is widely expected to hike official short-term rates when policymakers meet at the end of September. The positive jobs data contributed to a jump in longer-term interest rates, with the yield on the benchmark 10-year U.S. Treasury note briefly touching 2.95 percent, its highest level in nearly a month.

Across the pond, the pan-European Stoxx Europe 600 and Germany’s DAX 30 fell to their lowest levels in five months, as trade tensions and uncertainty about tariffs clouded the outlook for global trade. The unpredictability of the U.S. government in relation to trade is driving stocks lower, as it leaves companies uncertain about where to invest, while the overall global slowdown and high valuations of many European stocks have added to the impulse to sell. The MSCI Emerging Markets index is down more than 20 percent from its recent peak, officially putting it in bear market territory. Developing economies have been hit hard by a currency rout that began in Turkey.

In Asia, China’s benchmark stock index fell for the week, as traders braced for U.S. tariffs. For the week, the benchmark Shanghai Composite Index declined 0.8 percent, while the large-cap CSI300 Index fell 1.7 percent. The next rounds of tariffs, if they materialize, would mark a major escalation in the trade battle. Until now, the economic impact of the first $50 billion of U.S. tariffs on China has been relatively immaterial. In related news, a Chinese commerce ministry spokesperson warned Thursday of retaliation if Washington implements any new measures. Elsewhere on the Pacific Rim, Japanese stocks posted their largest weekly decline in over two months, weighed down by the effects of a severe typhoon and an earthquake on the northern island of Hokkaido.

Some additional market-related news that is significant but didn’t really move markets follows.

  • A decade after the financial crisis, profits, assets and influence have moved from investment banks like Goldman Sachs to money-management giants like BlackRock and Vanguard. These firms, once sleepy clients (the “buy side”) of Wall Street (the “sell side”), are now its power brokers, directing huge flows of capital and capturing the lion’s share of the finance industry’s fees.
  • The overall economic outlook looks fairly bright, but fall has often been a volatile stretch for global markets. Going back to 1945, the S&P 500 has notched its worst monthly return in September, and even optimistic investors and analysts seem guarded. Part of this uneasiness stems from the speed and scale of the stock market’s gains over the past few weeks, despite last week’s lull. The S&P 500 reached new highs after languishing in a narrow range for seven months, and the tech-heavy Nasdaq has risen even faster.
  • Fully 94 percent of the net increase in all U.S. jobs between 2005 to 2015 was in gig, contract, free-lance or temporary work, according to research by Harvard’s Lawrence Katz and Princeton’s Alan Krueger.
  • The economy is booming in some GOP-held battleground districts, data assembled by the Institute of International Finance shows. At the same time, a sizable number of competitive districts — almost all currently Republican — are vulnerable to new tariffs, a new cap on deductions for state and local income taxes or a jobs picture worse than the national average.

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