Published October 27, 2017
Investors are always wary of the “this time it’s different” mantra. Just before the housing crisis which led to the financial crisis in 2008, we were told that housing had entered a different phase, one where it somehow made sense that people were buying 2 and 3 houses on speculation. Several years before we were told that it somehow made sense that stock prices were selling for previously unheard of premiums to their earnings. Neither of those justifications worked out well for investors. This time we have a situation with the oldest member of the Dow Jones Industrial Average and one of the long-time bellwether companies of the U.S. economy. General Electric (GE), for the first time in 30 years or more, has sharply diverged from the performance of the broad stock market. This has been going on for a full year now with the divergence a startling 50%. On the left of Chart 1 below is a 30-year history of GE’s stock price shown with the S&P 500 index. On the right is a box highlighting the past year where GE’s stock halted and began its slide while the broad market headed upward.
Chart 1: General Electric diverges sharply from the broad market
GE is down some -30% from its peak in December 2016. It is down every month this year except for one: a slight +1% gain in February. The stock has accelerated its downward move this month currently down almost -10% for the month. Investors have begun fearing that the company’s dividend might be cut. The decline in stock price has pushed the dividend yield up to a hefty 4.4%. The company has a new CEO who will certainly make some changes to try and turn the stock’s fall around. Technically, the stock has fallen to a point where prior declines have halted.
Chart 2: General Electric stock price approaches significant prior support
Back in 2008, this support level did not hold and the stock went on to fall much, much further. Is this time different? Is GE going to remain on an island of declines while the broader stock market marches further upward? Or are we witnessing the last gasp of a bearish attack on the stock where buyers step in to buy up a bargain?
After a long stretch of grinding their way higher, stocks encountered some selling pressure throughout most of the week. Monday saw the indexes falling -0.4% while Tuesday recovered only half that decline despite strong earnings news and +5% moves from industrial heavyweights Caterpillar (CAT) and 3M (MMM). Stocks resumed their slide Wednesday with a -0.5% drop coming as investors sold the news in the face of mostly solid earnings from the likes of Boeing (BA) and Coca-Cola (KO). However, bulls could take some solace after recovering a good chunk of much worse declines earlier in the day. News of a coming reduction in bond purchases from the European Central Bank, another step in the unwinding of financial “help” from the world’s monetary authorities, factored in another effort by the bears to push stocks down Thursday. Congress’ ability to pass a budget helped rally the bulls once more to bring the indexes back to flat on the day as earnings from industrial companies continued to showcase strong global economic growth. Friday brought immense joy to the Nasdaq with that index’s bellweather companies – Amazon (AMZN), Microsoft (MSFT), Intel (INTC), and Alphabet (GOOGL) all crushing earnings estimates to send the Nasdaq higher by a huge +2.2%. The broader market was not quite as strong as most other market sectors struggled while tech soared.
Large-cap stocks managed yet another positive week – a two and a half month stretch of nearly non-stop gains – thanks to Friday’s push. The Nasdaq 100 (QQQ) romped +1.70% for the week while the S&P 500 (SPY) rose a much more modest +0.23%. The small-cap Russell 2000 (IWM) reflected the narrowness of the market’s advance with a -0.13% dip on the week. It has spent four weeks now wrestling to hold above 150.
Warm wishes and until next week.