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What Correction? Stocks Soar as FAANG Bites Back

By John Persinos on February 26, 2018

FAANG stocks today showed they’re still sharp, as they took a big bite out of the bear argument. Investors put aside their inflation fears, in the face of economic growth, strong consumer confidence and the forthcoming windfall from tax overhaul.

The Dow Jones Industrial Average, S&P 500 and Nasdaq all closed higher today, as market leaders regained their momentum and optimism returned to Wall Street. The rally on Monday was powered by large-cap technology stocks.

By the closing bell, FAANG’s “Gang of Five” had posted the following gains: Facebook (NSDQ: FB) +0.89%; Apple (NSDQ: AAPL) +1.98%; Amazon (NSDQ: AMZN) +1.46%; Netflix (NSDQ: NFLX) +2.88%; and Google parent Alphabet (NSDQ: GOOGL) +1.38%. The benchmark Technology Select Sector SPDR Fund (XLK) closed the day +1.55%.

The FAANG stocks are among the largest in the S&P 500 by market capitalization. Over the past year, these Silicon Valley stars have accounted for a major portion of the index’s gains. Apple, Alphabet and Amazon are the three largest S&P 500 stocks by market cap.

The FAANG stocks had greased the skids for February’s dizzying declines. Now, they’re helping dissuade bearish sentiment. Does that mean the correction is over? Only fools try to time the market’s bottom or top. An undercurrent of nervousness remains.

Investors will seek clarity this week from the testimony of policymakers and the release of new economic reports. The week ahead will be laden with market-moving data.

The 10% market decline in early February was one of the sharpest corrections since the 1950s. It was a stark reminder for many investors that, yes, stocks go down as well as up. The threat of inflation, the accumulated pressure of low volatility, and rising bond yields combined to trigger the plunge.

The low-inflation, low-volatility era is in the rear view mirror. The yield on the 10-year Treasury note has steadily climbed and now hovers close to 3%. Last week, strategists at Bank of America (NYSE: BAC) predicted that the 10-year yield would reach as high as 3.25% this year.

Higher bond yields boost borrowing costs. Economic growth and corporate profitability suffer. Higher yields also make bonds a more attractive alternative to riskier stocks — and they make excessive equity valuations harder to justify.

It’s no coincidence that February’s brutal sell-off occurred at the same time that we’ve experienced a changing of the guard at the Federal Reserve.

Powell on the hot seat…

Federal Reserve chair Jerome Powell faces questions from both houses of Congress in semi-annual testimony starting on Tuesday.

Powell is an unknown quantity. He hasn’t said much about the 10% fall in stocks this month. Investors are worried that Powell might not be as accommodating as his predecessor Janet Yellen in responding to financial risks.

One danger the Fed must grapple with in coming months is the possibility of an overheating U.S economy. Powell’s intended policy amid rising inflation remains an unknown. Wall Street is now betting on at least four rate hikes this year instead of only three.

In addition to Powell’s testimony, we face a particularly busy week of key economic data. On the docket:

New home sales (Monday); Durable goods orders, S&P Corelogic Case-Shiller Home Price Index, consumer confidence (Tuesday); U.S. gross domestic product, pending home sales index (Wednesday); motor vehicle sales, jobless claims, PMI manufacturing index, consumer comfort index, ISM manufacturing index, construction spending (Thursday); consumer sentiment, Baker Hughes rig count (Friday).

Sure, the stock market rises over the long haul. But the closer you are to retirement, the less time you have to rebound from the inevitable corrections. It took 25 years for the stock market to bounce back from the 1929 crash. It took 16 years for stocks to recover from the 1973-1974 bear market. Are you in a position to wait about two decades for stocks to recover from a crash? I didn’t think so.

This year’s correction might not have bottomed out. Stay cautious. If the Trump era has taught us anything, it’s to always expect the unexpected. In the meantime, we can rejoice that tech stocks have recaptured their mojo.

Monday Market Wrap

  • DJIA: +1.58% or +399.28 points to close at 25,709.27
  • S&P 500: +1.18% or +32.30 points to close at 2,779.60
  • Nasdaq: +1.15% or +84.07 points to close at 7,421.46

Monday’s Big Gainers

Analysts bullish over miner’s silver project.

Telecom to buy peer.

Merger talks boost chipmaker.

Monday’s Big Decliners

Software firm misses on revenue.

Food company’s earnings disappoint.

Analysts frown on food service firm’s proposed merger.

Letters to the Editor

“What do you think about investing in an algorithm fund? My financial advisor is recommending a fund that has a good track record, but charges 30% of the profit.” Beth J.

The investment world is embroiled in a debate between the merits of “passive” and “active” investing. While passive investing via algorithms has its place, I endorse a decidedly active role.

Algorithm funds performed well while the bull market was roaring ahead, but in today’s riskier investment climate, I question whether they can continue their winning streak and justify such high fees.

In an algorithm fund, declines can turn exponentially sour when the market goes south. Make sure you completely understand what you’re getting into. The guiding principles of algorithm funds can be opaque.

It’s during times of uncertainty and turmoil that the active approach can make a big difference. As I’ve outlined in previous issues, there are defensive and proactive measures that can not only protect your portfolio but also retain a growth trajectory.

Questions about algorithm investing? Drop me a line: mailbag@investingdaily.com

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.

 


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