Tech, Tariff Troubles Torment Traders; Stocks Slump
As a die-hard Boston Red Sox fan, I’m happy to report that baseball season is upon us. It’s appropriate, then, to describe today’s market action with a quote from baseball legend Yogi Berra (even though he was a New York Yankee): “It’s deja vu, all over again.”
Major indices Wednesday were volatile, whipsawing investors as stocks struggled to find direction. Losses accelerated in the final hour of trading. All over again.
Stocks today opened higher on positive economic data. The enthusiasm wouldn’t last.
The U.S. Commerce Department reported Wednesday morning that U.S. gross domestic product (GDP) expanded at a 2.9% annual rate in the fourth quarter of 2017, instead of the previously estimated 2.5%. That’s a modest dip from the third quarter’s robust 3.2% pace, but nonetheless solid.
The analyst consensus is that GDP growth will hit President Trump’s 3% annual growth target this year. The $1.5 trillion tax cut package and planned boost in federal spending should provide plenty of stimulus in coming months.
Economic growth could overheat, prompting more aggressive interest rate increases from the Federal Reserve this year. Indeed, rising interest rates and stirring inflation concern investors.
But those worries have taken a back seat to another set of interrelated threats: uncertainty in the technology sector and a brewing global trade war. Hence today’s choppy trading.
Money for nothing…
Henry Ford once said: “A business that makes nothing but money is a poor business.”
Say what you want about the early corporate giants like Ford, at least they built things. They made profits, but in the process raised the general standard of living.
The industrial pioneers who put their names on companies had large egos. But their legacies to society were large, too. After retiring in 1901 at the age of 66 as the world’s richest man, steel maker Andrew Carnegie became a philanthropist who gave away all of his money.
What do the hipster entrepreneurs running flashy social media firms actually produce? Nothing tangible. But the shares of their firms are excessively valued, based on wildly optimistic earnings projections.
Since the beginning of the bull market in March 2009, the price of tech shares has soared more than 480%. By contrast, the S&P 500 index has gained 290%. Many overvalued tech stocks are now contending with a day of reckoning.
The stock market in recent weeks has resembled a roller coaster, rising and falling by more than 1% on an intraday basis. Tech stocks have been among the most volatile.
The Facebook (NSDQ: FB) data privacy scandal has sparked fears of greater regulation. Two recent fatal crashes — one of a self-driving Uber car in Arizona and the other a Tesla (NSDQ: TSLA) car with autonomous features in California — also loom ominously.
As regulators scrutinize those accidents, the shares of chipmaker NVIDIA (NSDQ: NVDA) and electric car maker Tesla have plummeted. NVIDIA makes chips for self-driving vehicles.
Most of the so-called FAANG stocks took a beating today. Netflix (NSDQ: NFLX) was the biggest decliner in the five-stock coterie, dropping 4.96%. But it’s not just U.S. tech stocks. Tencent Holdings (OTC: TCEHY), considered the “Facebook of China,” fell 1.81% today.
China announced Wednesday that it would soon unveil a list of countermeasures in response to Trump’s new tariffs aimed at the Middle Kingdom. To be sure, the world’s second-largest economy is protectionist and purloins U.S. technology. The question is whether tariffs work or make matters worse. In a poll of major economists conducted by Reuters in March, 90% of respondents said tariffs are a terrible idea.
And yet, underlying economic growth is on track. The tax bill signed by President Trump in December should help the beleaguered tech sector. It will allow tech giants to repatriate their massive overseas cash hoards to the U.S. for taxation at a lower domestic rate. This infusion of cash should provide a powerful tailwind.
But first, the tech realm needs to get past this rough patch. As Facebook CEO Mark Zuckerberg gets ready to testify before an angry Congress on April 10, the social media business model could be in jeopardy. Zuckerberg is no Carnegie. Expect the young hoodie-wearing billionaire to get roasted.
The dour investor mood is global. Since hitting a record high on January 26, world stocks have swooned. The 47-country MSCI global index is down roughly 9% from its high.
All eyes in coming days will be on first-quarter corporate operating results. If earnings come in strong, many of the aforementioned fears could wane. If earnings come in weak, well, watch out.
Wednesday Market Wrap
- DJIA: -0.04% or -9.29 points to close at 23,848.42
- S&P 500: -0.29% or -7.62 points to close at 2,605.00
- Nasdaq: -0.85% or -59.58 points to close at 6,949.23
Wednesday’s Big Gainers
- RH (NYSE: RH) +22.48%
Home furnishings retailer beats on earnings.
- RSP Permian (NYSE: RSPP) +15.65%
Energy firm target of buyout.
- LaSalle Hotel Properties (NYSE: LHO) +15.33%
Analysts bullish on REIT.
Wednesday’s Big Decliners
- Edge Therapeutics (NSDQ: EDGE) -91.60%
Biotech discontinues drug study.
- Tesla (NSDQ: TSLA) -7.67%
Electric car maker investigated for fatal crash of test vehicle.
- Amazon (NSDQ: AMZN) -4.38%
Tech jitters punish e-commerce giant.
Letters to the Editor
“What’s your view on REITs right now, as interest rates rise?” — Adrian M.
Conventional wisdom says that higher interest rates are bad for real estate investment trusts (REITs). But rather than obsessing about the Federal Reserve’s next move, you’re better off focusing on the quality of a prospective REIT investment.
REITs generally hold their value well in a down market because the rents their tenants pay are contractual obligations. Rents also tend to rise with inflation, helping to offset its corrosive impact on purchasing power.
That makes REITs the ultimate total return investment. You can collect higher-than-average yields for years, even as the value of the units rise along with the value of the REIT’s property portfolio.
When you’re considering REITs, look for those that are consistently growing their funds from operations (FFO), which is how a REIT reports earnings, instead of the more familiar earnings per share.
Because FFO doesn’t include gains or losses on property sales, nor depreciation, the metric gives you an idea of how a REIT is doing on a real cash basis.
Questions about rising interest rates? Drop me a line: firstname.lastname@example.org
John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.