This letter will serve as a bit of a departure from most of my missives since I won’t be opining about politics at all. Frankly, there was so much in the way of political news flow this month that I wouldn’t know where to begin or end. Let’s simply suffice it to say that we live in very interesting times.
Besides, the markets had their own massive headlines in July. The proverbial dog days of summer are generally a bit slow on Wall Street since many traders take elongated vacations during this time. However, this month had plenty going on – some of it quite good, some not so much, and some signifying equity sea change. In no particular order, here are the high points:
- Equities had a positive month overall. The major averages were in the black, although the past few trading days have been difficult. Still, a decent start to the third quarter.
- Second quarter GDP came in at 4.1%, a mark not seen since 2014. It’s unclear how much of this is related to tax reform, deregulation, countries purchasing products before tariffs took effect, or simply business optimism. If anything close to this number is sustainable in the next few quarters to come, it should continue to be a tailwind for stocks.
- The ten year Treasury closed near the 3% level. This rise may be attributed to the GDP number, which may lead the Federal Reserve to enact two additional rate hikes in 2018. If so, the fixed income market would possibly continue to decline in value (interest rates go up, the value of bonds we already hold goes down).
- Oil prices continued their stealthy upward movement. Crude reached the $70/barrel mark. While this is good for GDP and oil producers/refiners, it’s inflationary for consumers. Some of the price action may be attributed to the summer active driving and flying season… we’ll need to see whether the trend lasts into the fall.
- Volatility began to pick up in the last week of trading. The VIX in and of itself was relatively placid, and nowhere near any level of short-term panic. However, individual stock volatility was quite significant. Companies that had strong earnings reports were generally treated well, with some upside revisions. However, those corporations that missed their numbers were taken to the woodshed with outsized losses.
The biggest story of July as far as the markets were concerned, though, had to do with sector and asset class rotation. While the major averages didn’t do much in the first half of 2018, a few stocks showed extremely strong performance. The “FANG” stocks – Facebook, Amazon, Netflix, and Google – led the parade. Honestly, a case can be made that without these four stocks, equities would have been in for a negative performance from January through June. Because of the large market capitalization of these companies, they are heavily weighted in index funds and exchange-traded funds. It seemed as though every fund manager had to own these names.
Unfortunately, July saw a massive reversal with regard to FANG and most other technology companies. Both Facebook and Netflix had lackluster subscriber growth, and traders punished them severely. Since gains were so prominent on NASDAQ through 20 July or so, once the selling began, the volume in these high flyers was intense. The last week of July equity trading displayed a definite shift from growth names to the value sector.
This is potentially a move of some consequence. In many prior bull cycles throughout history, a focus toward dividend paying stocks has signaled a more conservative outlook for equities. This becomes particularly more interesting since the 3% level of the ten year Treasury is getting to be more attractive for yield hungry investors.
I honestly don’t know at this juncture whether this shift is algorithm driven via machine trading or if there is substantive human direction. I’ve been waiting for a change of this type for a while, and I’m a value guy by nature. Dividends in this environment are good, and I’ve never been crazy about chasing performance in a limited number of issues.
2018 continues to be a challenging environment for asset performance. There are daily cross currents at work, and markets seem to be overloaded with decision-making information. I know that I am… had I talked about the political landscape at all, this letter would have been five pages instead of two.
We continue to monitor events closely, and will keep you apprised of major changes in the markets. In the meantime, please feel free to e-mail or call with questions or comments. Thanks as always for your trust and support.
The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.