Published April 27, 2018
In September of 2007 emerging market stocks ripped higher posting a +10% gain for the month. You would be forgiven for thinking that the market-leading group was merely continuing its 4+ year party, after having already risen four-fold.
While the force behind the rise of emerging markets, namely China’s unprecedented build-out, appeared well on track, the September leap in prices of emerging market stocks would prove to be the end of the road, what technical analysis folks call an exhaustion climax or “blow off top” where sellers are absent and prices launch their final ascent.
A couple of months prior to this September run higher in emerging market stocks, two hedge funds managed by investment bank Bear Stearns were failing, a victim of too much leverage and an unfolding mortgage bond crisis that few were paying much attention to. Only one year later, Bear Stearns was gone and the financial world was reeling, in the midst of its worst crisis in half a century.
Fast forward almost a decade and we may have just witnessed the same market phenomenon. A years-long rally in the so-called FANG stocks have driven our focus Nasdaq 100 index to great heights. (FANG = Facebook, Amazon, Netflix, Google (and sometimes Apple for completeness.) January’s +10% pop higher in the index, coming after a powerful 18-month move upward in 2016/2017 looks very similar to the end of the emerging market rally a decade earlier.
This week the FANG stocks brought forth their latest quarterly earnings reports. They were outstanding! These companies are making money by the truckload with no end in sight. While the stock market generally rewarded the companies for those stellar earnings, pushing their individual stock prices higher, there was something missing. The broad stock market could not muster a rally. There was no widespread celebration as the FANG companies obliterated earnings estimates and further solidified their dominance.
So was the January 2018 leap the market’s exhaustion climax/blow off top? Was it the end of the road for this bull market? Unlike 2007, there have been no fund failures of note, few warning signs of impending financial crisis. There are the usual worries about debt, et al. But nothing particularly new along the lines of the Bear Stearns fund failures, which really were a shock at the time in the financial community.
At a minimum, today’s market reaction to exceptional FANG earnings, where the Nasdaq 100 (QQQ) gave up a hefty opening gain, could be a warning that buyers have given up for now, that January’s sharp rise was it for awhile. That it is time to hunker down, play small-ball, and make money off the short-term swings in price as our Turbo Model has been trying to do (and largely succeeding at!).
This was a week where the net change in the stock market indexes does not begin to tell the tale. Monday began the week’s blizzard of earnings announcements with consumer staples maker Kimberly-Clark (KMB) noting that rising commodity prices are crimping margins. Coincident with that note, US 10-year Treasury yields vaulted up near the closely watched 3% level. That negative backdrop wouldn’t have an impact on stocks in Monday’s session, which ended flat. But it softened investors for a second round of comments from heavy equipment maker Caterpillar (CAT) on Tuesday. The company beat earnings estimates, as did almost all the major companies reporting on the day. However, comments from executives that margins are peaking sent a shiver through the market, leading investors to sell indexes down -1.3%. Wednesday brought a breach of the 3% yield on the 10-year Treasury bond, a point which pressured stocks early. On this day though earnings came to the market’s rescue with Boeing (BA), Texas Instruments (TXN), and railroad Norfolk Southern (NSC) all rising on happy earnings reports. Those positive earnings responses kept the broad market up +0.2% for the day. Stocks continued a positive earnings vibe Thursday with Facebook (FB) jumping +9% on strong earnings while Visa (V) joined in with a +4% lift of its own. Indexes recouped +1.0% to put the week back in the green as interest rates slid back under 3%. Then, the rug felt pulled out once again. If you’re a bull Friday had to be deflating. Blowout earnings from market/tech/consumer leaders Amazon (AMZN), Microsoft (MSFT), and Intel (INTC) were initially met very warmly only to find the broad market selling the strength en route to a flat finish; and doing so despite seeing interest rates dipping further back under 3%. The move suggested strongly that investors are really focusing now on the narrative that profit margins and earnings might be peaking. That’s a far cry from the market’s story in the second half of last year where a synchronized global economic boom was just beginning.
Is it the beginning or the end? Markets don’t know. As a result a week with turbulent undertones ended with the S&P 500 (SPY) flat at a change of -0.02%. The Nasdaq 100’s (QQQ) big guns reported stellar results only to see the index shrug to a -0.13% weekly tally. Small-cap Russell 2000 index (IWM) better reflected the underlying negative skew to the week with a -0.55% slip.
Warm wishes and until next week.