Barron's Weekend Summary: Wall Street experienced a wild week with dramatic stock swings
Cover:
-Wall Street experienced a wild week with dramatic stock swings, currency convulsions, and a surge in stock market volatility not seen since 2020. Despite the trading losses, the investment world saw a wake-up call from a weak July jobs report and an uptick in Japan's ultralow interest rates, which shattered complacency about the status quo. Skeptics have begun to question whether artificial intelligence will deliver on the promise implied by the near-vertical rise of the market's largest technology stocks this year. A contentious US election season and heightened global turmoil could pose more worries for the markets. Despite US stocks regaining ground, it is hard to say the turmoil is over, so it is a good time to diversify into less highly valued corners of the market than some of the Magnificent Seven tech stocks and other richly priced shares.
Interview:
-Torsten Sløk, chief economist and partner at Apollo Global Management, is known for his insightful observations on the economy and financial markets. His daily emails are filled with topics such as household wealth, commodity prices, small-cap earnings, the Treasury yield curve, and yen appreciation. Sløk joined Apollo in 2020 after 15 years at Deutsche Bank and has worked at the Organization for Economic Cooperation and Development and the International Monetary Fund. He is often consulted about the markets' latest tantrum, economic outlook, and future interest rate trajectory. On Aug. 5, he discussed topics such as the yen carry trade, inflation expectations, and the Federal Reserve's upcoming conference in Jackson Hole, Wyo.
Tech Trader:
-A federal judge has ruled that Google has monopolized internet search in a landmark antitrust ruling. The ruling is expected to significantly impact internet search or revenue for Google-parent Alphabet, as other antitrust cases involving Google and Microsoft had little impact on the internet industry. Apple could prove the bigger loser, as it gets a big chunk of its profits from that exclusive arrangement. Google is appealing the ruling, as Apple gets a big chunk of its profits from that exclusive arrangement. Investors don't seem to see the distinction, with Alphabet stock losing 2.8% since the ruling, while Apple is off 3%. The court must now conduct a separate trial on a remedy for the Google monopoly, as antitrust remedies have had an ineffective history on the internet.
The Trader:
-On Monday morning, investors were left with a white-knuckle market, with Japan's Nikkei 225 index falling 12.4%, its worst plunge since 1987, due to disappointing U.S. economic data and a surge in the Japanese yen. The S&P 500 index dropped 3%, while the Nasdaq Composite fell 3.4%. The Dow Jones Industrial Average was down 2.6%. Most observers took it in stride, as the S&P 500 had climbed 15% in the first half of the year and set over 30 new closing records. A reset could create a more solid foundation for a push higher over the rest of the year, assuming the U.S. labor market holds together. The tech-heavy NASDAQ Composite was down 13% from its mid-July peak. The move is magnified by unprecedented concentration, as tech stocks had ballooned to the point that any natural rotation away from those names caused waves rather than ripples in the broader market.
-TJX Cos experienced a 3.8% drop in its worst percentage decrease in over two years during Monday's selloff, with retail in general being affected by fears of deteriorating economic conditions. Consumers are already feeling stretched by inflation, so a worsening macro backdrop would likely mean less willingness to spend on discretionary goods. However, TJX's decline looks like an overreaction, as the company has long been a market-share gainer in retail and does particularly well in times of economic turmoil due to its value focus. TJX's core customers are wealthier than those of peers Burlington Stores and Ross Stores, meaning they are more likely to trade down to discounters rather than cut out discretionary spending altogether. TJX looks particularly well positioned during the key back-to-school shopping season, given ongoing economic uncertainty.
Features:
-The Magnificent Seven have significantly boosted the S&P 500 index over the past year and a half, but their high valuations have caught up with them, and the catalyst for propelling less-loved equities higher is becoming clearer. The Fed's recent indication of a rate cut at its September meeting is more likely than not. Investors are considering preparing their portfolios for a market where the recent drivers of gains, big technology stocks, are not as dominant. To prepare, consider whether your portfolio is equity heavy, considering the percentage of large caps in your portfolio at the beginning of 2023 compared to now. Rebalancing your portfolio towards long-term targets, such as dumping stocks and buying bonds, may be necessary. Small-cap stocks and other lagging equities are also in the limelight as gains broaden across the market. Their valuation is at a significant discount compared to large-cap stocks, even relative to their own history.
-Trump Media & Technology Group (DJT) reported sales of $837,000 and a net loss of $16.4M for the quarter ending June 30, an improvement from the previous year. The company's losses were mainly due to legal expenses from its merger with Digital World Acquisition Corp. Losses per share declined to 10 cents, but sales fell by 30% from $1.2M a year ago. Cash equivalents were $344M, up from $2.6M a year ago. Trump Media has no debt and is minimizing its reliance on Big Tech by creating its own hardware infrastructure and software system. Shares peaked on March 27 at $66 a share, but have fallen more than 60% since then.
European Trader:
-Inditex, the owner of Zara, is targeting the US market as a potential growth engine. Despite having 101 stores in the US, the company has only expanded under CEO Oscar Garcia Maceiras. Over the next two years, Inditex plans 30 projects, including new stores, relocations, and enlargements, in major American cities. The US has become Inditex's second-biggest market, accounting for 7% to 8% of total revenue and less than 2% of its global store network. The company faces competition from Chinese fast-fashion company Shein, which has grown since surpassed Zara and its rival H&M (Hennes & Mauritz) in late 2021. However, Zara's more upmarket price point should give it a distinct position in the US. Analysts at UBS suggest Zara could aim for a similar density. The company sees significant long-term growth opportunities in the US, as it takes less than 50 cents for every $100 of fashion sold.
Emerging Markets:
-Emerging market bonds are a mix of a haven and a risk asset due to the recent global market turmoil. Around 60% of the asset class consists of sovereign debt from investment-grade countries, including Poland, Saudi Arabia, and South Korea. Yields on these bonds fell as stocks hit an air pocket in early August. However, spreads over US Treasuries widened by about 20 basis points to 130 basis points, affecting high-yield emerging market paper and causing a selloff in turnaround stories like Argentina, Turkey, and Ecuador. The lower the credit rating, the larger the selloff has been. Local-currency debt is also in danger, but managers worry about the fading of the yen carry trade, which involves borrowing cheaply in Japan to reinvest in high-yielding Latin American markets. As equities continue to gyrate, the prevailing mood on emerging market bonds is to wait and see, with activity muted and bid/ask spreads very wide.
Commodities:
-No update
Streetwise:
-JP Morgan predicts that cruises are 20% cheaper now than land-based alternatives, compared to 10% to 15% cheaper in 2019. This market share shift is part of why it recently covered Six Flags Entertainment at Underweight and added Overweight-rated Royal Caribbean Group to its Analyst Focus List. Walt Disney World in Florida has seen higher prices for admission, hotels, and restaurants due to the pandemic, with discounts becoming skimpy and free perks like airport bus service and parking for hotel guests taking on surcharges. Disney World prices remain high, but discounts have grown larger and some surcharge backtracking has occurred. Disney's results for its fiscal third quarter showed meager growth in its Experiences division, which includes parks, and management foresees flat revenue and a small decline in operating profit. With theme park prices up 37% since 2019, there will be limited opportunity for companies to juice results by charging more. Disney's streaming operations have reached modest profitability, and its studios are on a record-setting summer box-office haul from Inside Out 2, an animated film featuring personified emotions.