Some thoughts on the recent market selloff
As I write these words, the Dow Jones Industrial Average is up nearly 400 points, about 1.85%. The Nasdaq is up even more. Does that mean the market rout is over? No. But, for me, it does suggest a lot of the downdraft was caused by automated selling, with algorithms amplifying volatility.
Nothing in the real economy suggests we are near a recession. It’s not even clear the economy is slowing. Initial jobless claims, the weekly data set I watch, showed the 4-week moving average was 211,750, unchanged from the previous week’s unrevised average of 211,750.
It is noteworthy, however, how much more different indices have lost than the US due to market jitters.
Equity ETFs, % Below 52-Week High…
China $MCHI: -32%
Africa $AFK: -26%
Emerging Markets $EEM: -26%
Asia ex-Japan $AAXJ: -26%
Europe $VGK: -21%
World ex-US: $ACWX -20%
Latin America $ILF: -19%
EAFE $EFA: -19%
Japan $EWJ: -17%
Total World $VT: -14%
US $VTI: -10%— Charlie Bilello (@charliebilello) October 25, 2018
The world ex-US was down 20% this morning, a bear market. While the US was down just 10%, using Vanguard’s Total Stock Market ETF. Notice too that European equities closed yesterday at an 18-month low. They’re down 12% year-to-date. And Europe is down 21% in total from its highs. That’s a big difference.
What about Europe?
So it makes sense that people are wondering what the ECB is going to do in the face of all of this. Europe’s macro data have been weak of late. And in today’s ECB press conference, ECB President Mario Draghi had to take a position regarding the dispute over Rome’s budget plans because the ECB’s exit from ultra-loose monetary policy could hit Italy hard. And the ECB own 360 billion euros of Italian debt.
Of course, Draghi rebuffed the doves’ calls to delay policy tightening. Initially, German bunds sold off and the euro strengthened in the initial reaction to the news. But, though the data in Europe are weaker, as with the US, the weakness does not presage recession. And so, in the ECB’s view, the risks remain balanced, meaning they see no reason to change policy.
My view here is that markets aren’t really forecasting machines regarding downturns. More than anything, markets are transmitting disquiet about the pace of policy tightening and its effect on earnings. And that doesn’t mean recession or financial crisis.
As I indicated last month, I think it’s worth considering whether we are closer to the end of the emerging market selloff. But Emerging Markets equities hit an 18-month low yesterday. And they are down 18% year-to-date and 26% from their January high. It highlights why I continue to be cautious about rotating out of the US into markets-ex US. That trade – recommended by Jeremy Grantham at the start of the year – is under-performing. We’re getting closer though.
Tech isn’t terrible
On specific shares, let me mention Microsoft briefly.
“If you told an investor a few years ago that Microsoft is on the cusp of a $1 trillion market capitalization and could surpass Amazon, they’d think you were crazy”
-Dan Ives, a managing director at Wedbush Securities.
But that’s what’s happening, even as the FAANG stocks get shellacked. Here’s the New York Times story on their earnings.
Microsoft’s Earnings Surge, as Cloud Bet Continues to Pay Off
Apple has its cash cow, the iPhone, which has made it the world’s largest public company. Amazon transformed an array of industries, from logistics to the way consumers buy, to become the second largest. For Microsoft, which is gaining ground on Amazon, growth runs straight through the cloud.
In the past several quarters, Microsoft’s commercial cloud offerings have grown by big leaps, helping push the company’s market cap to about $785 billion. On Wednesday, the company reported that the fast growth had continued in the latest quarter, as part of an earnings statement that beat analyst expectations and the company’s own guidance across every segment of its business.
Microsoft’s first-quarter revenue was up 19 percent over the previous year, to $29.1 billion. Net income rose 34 percent, to $8.8 billion.
“We are seeing larger and longer-term customer commitments to the cloud,” said Amy Hood, the company’s chief financial officer.
People have tended to write Microsoft off as old tech. I think they still have something to offer.
I mentioned yesterday, I had other tech stories. Here’s one that hues to my prejudices against the electric scooter rental companies.
Scooter companies are moving fast and breaking people, but they say they’re not to blame
As I bike to an Oakland town hall meeting about scooters on Monday, I see two young men riding electric scooters. They both look to be about 15 and neither are wearing helmets. One is with me, on the street. The other is on the sidewalk…
At the scooter community town hall, representatives from Lime, Bird, and Skip make a point of telling Oaklanders that teens on scooters definitely aren’t the scooter companies’ fault. “To some degree, this is a parent issue,” says Marlo Sandler, the senior manager of government relations at Bird. Skip requires riders be at least 18 years of age, “so if someone underage is riding, an adult had to provide an ID and a credit card, so certainly parenting issues are part of it,” says Muriel MacDonald, Skip’s director of public affairs. EV Ellington of Lime wisely said nothing about parenting strategies, instead noting the company had implemented no-parking zones around schools.
Scooters on sidewalks? A failure of education, according to the scooter companies. Riders without helmets? Well, more outreach will solve it. The companies’ excuses for abuse aren’t much different from Facebook or Twitter’s: they designed their scooter systems in good faith, so bad actors must be someone else’s problem. You should wear a helmet when riding a scooter, so really riders are responsible for not wearing helmets that aren’t provided with the scooters. (Why anyone would walk around with a spare helmet is left unexplored by Ellington, MacDonald, and Sandler.) And perhaps the city is at fault, too! After all, if scooter riders are on sidewalks, maybe they just don’t feel safe on the streets — you can’t blame the scooter companies for poor infrastructure.
My view: these companies are free riders. They are using the existing infrastructure to make a quick buck and trying to slough off all of the risk onto users and the cities in which they operate. There are externalities to the proliferation of these scooters and we’re going to be the ones picking up the tab.
Apple’s TV subscription service starts in 2019 to compete with Netflix, Amazon
According to “three people familiar with the company’s plans,” Apple’s subscription service will include original content and will let users sign up for network subscriptions, such as HBO and Showtime, within the same app. It’s unclear if the service will live in a new app or in Apple’s existing TV iOS app.
Apple reportedly plans on making the original content on the service free for Apple device owners. This aspect of the service has been reported for a while now. But it has also been rumored that Apple will restrict the subscription service to Apple devices, such as the iPhone, iPad, and Apple TV.
I’m not impressed. Live TV would be more interesting. Let’s see where this goes.
Tim Cook calls for strong US privacy law, rips “data-industrial complex”
We at Apple are in full support of a comprehensive federal privacy law in the United States. There, and everywhere, it should be rooted in four essential rights: First, the right to have personal data minimized. Companies should challenge themselves to de-identify customer data—or not to collect it in the first place.
Second, the right to knowledge. Users should always know what data is being collected and what it is being collected for. This is the only way to empower users to decide what collection is legitimate and what isn’t. Anything less is a sham.
Third, the right to access. Companies should recognize that data belongs to users, and we should all make it easy for users to get a copy of, correct, and delete their personal data. And fourth, the right to security. Security is foundational to trust and all other privacy rights.
My take: Companies that sell products and software don’t need all your data. Companies that let you use their products and services for free do. Amazon is an interesting hybrid here because they really want your data much more than Apple does because – unlike Apple, which sells a limited number of products – their goal is to know what you like and what you do to get you to buy more stuff. I am wary of Google, Facebook and all of these newer tech companies that gobble up my data.
How to Clear Your Search History Off of Google’s Servers With the Company’s Latest Update
Google, one of the biggest stashers of our personal data, just updated Google Search—Aka Google-dot-com—to make it easier for you to review and edit what search data the company stores. The Google Search page now features a link below the search bar that will take you directly to a new data privacy hub that let’s you scroll through and delete parts of whole swaths of your search history. It also gives you easy access to “Google-wide” controls, such as tracking activity on Google’s sites and ad personalization.
Speaking of big tech, this story is interesting.
When Sears Flourished, So Did Workers. At Amazon, It’s More Complicated.
Half a century ago, a typical Sears salesman could walk out of the store at retirement with a nest egg worth well over a million in today’s dollars, feathered with company stock. A warehouse worker hired now at Amazon who stays until retirement would leave with a fraction of that.
Much as Sears has declined in the intervening decades, so has the willingness of corporate America to share the rewards of success. Shareholders now come first and employees have been pushed to the back of the line.
This shift is broader than a single company’s culture, reflecting deep changes in how business is now conducted in America. Winner-take-some has evolved into winner-take-most or -all, and in many cases publicly traded companies are concentrating wealth, not spreading it. Profit-sharing and pensions are a rarity among the rank-and-file, while top executives take home an increasing share of the spoils.
Amazon shareholders have benefited more than workers, but Sears, in its heyday, tried to serve both.