A Look to The February Stock Markets
The January winter blizzards were quite symbolic of the walloping the financial markets experienced last month. Unfortunately, market storms aren’t telegraphed by Doppler radar and aren’t broadcasted by your local meteorologist ahead of time. But like severe weather, market corrections (a 10%+ decline) are a fact of life and, although they are extremely difficult to time, their negative impact can be mitigated by some prudent portfolio management. Here’s the final scorecard for January with a little bit of color.
January was the worst performance month since March 2020 (at the depth of the COVID selloff) that saw the largest January selloff since January 2009. The S&P 500 finished the month down 5.4% which fared much better than the tech heavy NASDAQ that was down 8.9%. Performance would have been even worse had it not been for an end-of-month two-day relief rally that benefited both Indexes. The month also had one of the wildest trading days seen in years. On the 24th, the DOW Jones rallied back from a whopping 1,100-point deficit to finish the day in the green. These are heart pounding market swings, but the last thing you want to do is make any reactive emotional investment decisions. Those investors that panicked that morning certainly regretted their decision later that same day. We all know that gutted feeling that can be brought on by a market correction, but investors need to stay emotionally disciplined to successfully weather the storm. Reasons being…corrections are fairly common and have occurred approximately once a year on average since the end of World War II. The good news is that markets bounce back quickly – normally within one to four months depending on the severity of the correction.
So, what led to the correction this time around? As always, the answer is a combination of various things, but in all honesty, it’s really been long overdue. The Fed ignited things last quarter by announcing the removal of stimulus measures and provided guidance on multiple rate increases. The expectation of higher rates hit the technology sector especially hard and technology companies have also become a victim of their own success during the pandemic. Tech earnings and sales comparables became harder to beat and that lead to disappointing forecasts and a boarder market sell off. Going into January, I wrote “If you haven’t done so already, I’d strongly suggest dialing down the octane filled high flying growth portion of your portfolio”. This type of preemptive maneuvering would have helped dampen the blow caused by this recent sell off.
On a more macro level, the market is concerned over global growth in an inflationary environment with geopolitical risk knocking literally at the doorstep of Ukraine. China’s zero COVID policy has tempered growth and prolonged supply chain issues. What the market may be underestimating is the resiliency of US consumers who are flush with employment and cash on their personal balance sheets. On average, the US economy has added approximately 500,000 jobs over the last three months.
Elephant in the room – Is FANG still the posterchild for growth?
It’s been almost a decade since this famous acronym was coined. It refers to the four prominent American technology companies – Meta (FB) (formerly Facebook), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOG). In the past, investors have had a “set it” and “forget it” mindset when it comes to these big four as, historically, this has been a can’t lose trade. But more recently, investor have been forced to reevaluate that strategy as volatility and big single day drawdowns hit investor confidence even when it comes to blue chip stocks. Netflix was the first shoe to drop when subscriber growth missed expectations and shares fell over 20% in a single day. Meta followed with a 26% drop post earnings reacting to slowing growth and disappointing forecasts. The selloff set a record for largest one-day loss in market value ever in history totaling $232 Billions in wiped out value. Zuckerberg alone personally lost $29.8 Billion. But, don’t worry, he’s still super rich and awkward. Google seems to be the only market darling in the group left after posting yet another impressive quarter. Amazon, the juggernaut, has traded sideways for the past year with a few misses along the way. As a group, it’s something of a mixed bag of growth and value attributes. Bill Ackman of Pershing Square Capital stepped in to gobble up 3 million shares of Netflix sighting the activate valuation that emerged. Whether you agree with Bill or not (I’m giving Bill the thumbs up), I think it’s time to disassemble FANG and no longer treat them as a group. They’re all grown up and are going their separate paths.
It’s-a-Me, Mario! – Video Game arms race
As many of you already know, the video game industry has been a core part of my portfolios for a long while. The thesis has always been that, just like traditional entrainment businesses, content is king! Recently, the video game content wars began to heat up just as we witnessed in the movie/television streaming sector years prior. Microsoft announced that it will be buying video game giant Activision Blizzard in a $68.7 billion all-cash mega deal. Activision is most recognized for being the maker of the popular game franchise Call of Duty. This follows Grand Theft Auto creator Take Two’s $12.7-billion-dollar acquisition of Zynga whose is a leader in mobile gaming. Not to be left in the cold, Sony announced their own $3.6-billion-dollar acquisition of Bungie, the maker of Halo. Three mega deals in a month clearly shows the cats out of the bag and the big boys are positioning themselves for long-term growth. Look for things to heat up even further as video game streaming grows in popularity and more subscription model offerings come to market.