Tuesday, June 20, 2017

Technology Stocks Continue to Define New Market Paradigm

Tuesday, June 20, 2017 - Stocks were mixed last week driven by various news headlines including a terrorist attack on GOP Congressional Members while practicing for a baseball game, an expected Fed Funds Rate increase of 25 bps, the retirement of Jeff Immelt from GE and the Friday surprise announcement by Amazon of its acquisition of the Whole Foods supermarket chain. US Equities continued their record climb with the Dow Jones Industrial Average hitting a new closing record of 21,384.28. The S&P 500 closed relatively flat at 2,433.15 and the NASDAQ Composite closed at 6,151.76. Crude oil prices eased to $44.74 a barrel - a drop of 2.4% for the week. Treasury prices firmed especially on the long end of the curve.

While easy money continues to fuel asset prices, markets shrugged off comments by noted observers that the US political process hit a new low with the early morning attack on GOP members. Friday, investors refocused on the big FANG Stocks after a brief slide and how these technology stocks will expand their footprint into new sectors bringing new efficiencies and compressing margins of existing retailers. Amazon is the lead disruptor in this space. Especially vulnerable are retailers and brand name manufacturers ranging from food condiments like spices, to razor blades and battery manufacturers like Duracell.

While Investors continue to hold out for the Trump “Reflation” trade, they now face headwinds from the usual Washington political stalemate as well as recession “yellow flags” like weak oil prices and a continued T-Bond price rally (where yields fell) indicating the Bond Vigilantes continue to see weak economic expansion.  Indeed airline delays and woes on the Amtrak Northeast corridor (its most popular line) signal the need for a big infrastructure spend. This week overseas investors will be focused on MSCI’s decision due this Tuesday on whether to include China A Shares into one of its flagship Emerging Markets Indexes. Expect continued saber rattling on the Korean peninsula and more clashes in the Middle East.

Market Rally skeptics continue to dwell on concerns that the popular indexes are being driven by a small number of tech stocks which carry a heavy weight in market cap weighted indexes such as the S&P 500, thus setting the scenario that they gain from momentum trades of active managers buying them while trying to keep up with the index returns. While this is true, investors will be reassessing how strong the “Moat” is around these FANG Stocks. We suspect the Moat’s sustainability factors are very strong and that, combined with cash on hand and high stock prices, will enable Tech firms to become more active in making acquisitions in non-technology areas as a means for earnings growth. These acquisitions will have long-term structural changes in certain sectors of the economy.

We continue to believe that the animal spirits unleashed by the excitement of the Trump Presidency are alive and well.  We continue to favor the Reflation trade and the proposed tax reform and relaxed financial regulations that could benefit sectors like select Financials, Restaurants, Utilities, Technology, and Healthcare Insurers – although significant risks abound in the healthcare sector with proposed reforms. Like healthcare, tax reform will not be easily resolved. Value Investors should include Energy stocks in their portfolio. Indeed our Quant Score list shows 10 of the top scoring funds as Energy funds and 4 of the top 10 Quant Movers for the past week were in Energy. The list includes IEO, RYE, XLE, IXC IYE, JHME, FILL, FXN, FENY, VDE, ERGF and FRAK.

Interesting Theme ETFs that look attractive from our models include OLD, FITS, SMH and XSD. We suggest looking over the ETFG Select List to zero in on attractive plays and sudden changes in our ratings outlook. We may be entering a period of market leadership changes within some sectors, so be sure to check the Quant Movers Daily.

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