Outlook and Strategy for June 7, 2017.
Sell-offs or market adjustment in high-flying tech and semiconductors is noticable. Stocks such as ATVI, EA, ADBE, RHT, ADSR, MU, PYPL, NVDA, LRCX, and AVGO have had the fastest run-up and are at the greatest risk for a sell-off or correction. Howver, the bigger name FAAMG stocks that include Google, FB, Netfix, and Amazon have led the sell-off. Questions to ask are 1) are these stocks over valued, 2) what are the implications for the rest of the market, and 3) what do stock and market fundamentals tell us.
I’ll address these three questions in order. First, no, these stocks still have high rates of earnings growth and do not seem overvalued on that basis. Moreover, overall stock earnings are still strong and earnings should to continue their strong rates of growth. July earnings season will be what to watch. Second, the overall market is now driven by earnings growth in travel and leisure (millennial spending on experiences), health care expenditures on insurance, hospitals, biotech and pharmaceuticals, capital investment in emerging markets (a strong area of growth), oil and gas derivatives, the “stay-at-home” economy where expenditures on content streaming and video games is strong, the military defense sector thanks to the N. Korean problem, aerospace, housing where demand exceeds supply, e-commerce due to a change in consumption patterns, and banks due to modest FED tightening. The only weak sectors are autos and traditional retail. Thus, the overall market has more positives than negatives concerning economic growth drivers. Third, market history tells us that late stage market expansion tends to occur in tech and semiconductors, thus we must be concerned that a sell-off in these might lead to a broader sell-off. Also, technical chart analysis shows a tightness in the trading range of the major stock indexes. This implies increased volatility ahead. The risk is that negative news out of Washington leads to a negative break out and wide-spread selling. So read the blog post entitled “Look Out Below” for your own benefit in the event that military action against N. Korea occurs.
That about sums it up. Good Investing!
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July 21, 2017 market update:
We haven’t had a 5% – 10% correction in the S&P 500 for more than a year. some think that a major crash is due because we haven’t had one in 10 years. The crash scenario is unlikely because of the slow recovery that is now only beginning to accelerate, earnings reports are generally good and improving, we still have low interest rates, and consumer spending and expectations are strong.
The correction scenario would actually be good, allowing the bull market will remain as the major market thesis and will even become stronger because of it.
The only reason for a crash or recession would be an internal economic shock due to the Fed increasing interest rates too fast. This appears unlikely because Janet Yellen (the Fed chair) is a liberal dove. An external economic shock due a geopolitical event is not likely, but always a small possibility. That is why some hold gold or cash. Unfortunately, a geopolitical catastrophe is not predictable, hence why recessions are also not predictable. Thus, the best market strategy now is to continue to buy good stocks such as my weekly picks on any dip or pull-back.
