By Jacob Manoukian, JPMorgan
It’s not how you start, but how you finish.
In some ways this week, the market just continued to consolidate after a bout of Fed-driven volatility that caused a violent sell-off during the month of January.
But that really understates the drama.
The market started the week with a strong rally (up 1.9% on Monday, 0.94% on Tuesday and 0.69% on Wednesday), but then dropped 2.44% on Thursday.
The culprit? Meta (nee Facebook) alone lost $250 billion of market cap within 24 hours (the largest single stock decline in history). The social network reported stagnant user growth.
Another big gainer this week? Crude oil is up 6% and trading over $90 per barrel for the first time since 2014. The energy sector is close to recovering all of its pandemic-era losses, and gasoline prices are once again at multi-year highs.
It was at least refreshing that corporate earnings were driving volatility both up and down, and not so much the Federal Reserve. In today’s note, we dig deeper into the growing divide within the technology sector, Omicron and three other things that investors should care about.
5 things that investors should care about besides the Fed
Most of our notes this year have focused on the shift in Fed policy, and for good reason. But now that markets are settling down from their Fed fear-driven sell-off, we thought it would be a good idea to pick our heads up and point out some other dynamics that investors should consider as market movers as we head into February.
1. A growing divide in tech
“Tech” is a big universe. In popular parlance, it can include companies with business models ranging from manufacturing semiconductors (e.g., AMD) to producing reality shows you can stream on your smart TV (Netflix), to ordering stuff online (e.g., Amazon).
So far this earnings season, there has been a stark divide between the kind of “tech” companies that produce and sell technology hardware and services (such as cloud computing), and those that rely on user engagement for growth.
Here are some examples of companies that make tech goods or services:
Microsoft showed strength in both personal computing and cloud services, and its upbeat outlook on the latter sent shares higher.
Apple’s margins exceeded expectations despite supply chain and shortage challenges.
Alphabet jumped back to all-time highs on strong search activity and enthusiasm around a stock split.
Advanced Micro Devices beat expectations and suggested continued strong demand for semiconductors, as did Qualcomm (which, to be fair, had a more mixed stock reaction).
Amazon surged after releasing its earnings report that suggested its cloud business is still accelerating quarter-over-quarter. It’s hardly a retailer anymore, at least in the eyes of the stock market.
And here are some companies that rely on users being engaged online:
Meta dropped 20%+ immediately after reporting slowing user growth and reporting revenue that missed estimates by $1 billion to $3 billion.
Netflix dropped like a rock after citing weak user growth.
Spotify dropped like a rock after citing weak user growth.
Snapchat, surprisingly, bucked the trend and surged over 50% after reporting a 20% surge in daily users and posting its first profit.
You can see the dynamic which shows the performance of global social media companies and global semiconductor companies. Social media companies are down 40% from peaks, while semiconductor manufacturers (the physical inputs to technology) are still in an uptrend.
The explanation seems simple to us: Businesses are still flush with cash and have demand to upgrade their technology platforms, but consumers are sick of spending time online.
Season Two of Tiger King just ain’t it.
2. The Omicron surge is receding
It has been 10 weeks since the Omicron variant was discovered. In that time, 90 million COVID-19 cases were reported globally. That is more cases than were reported in all of 2020. Given the sheer number of people who were infected, exposed or caring for someone who was ill, it seems reasonable to expect that it had a big impact on the U.S. economy in January.
However, the employment report was surprisingly strong: 467,000 workers were added to payrolls in January, and December’s number was revised higher from 199,000 to 510,000 jobs added.
Companies are also adapting to COVID waves. Old Dominion Freight’s CFO even likened the labor shortages from COVID to seasonal bad weather that impacts operations in the winter. From an economic standpoint, this suggests that corporate America is really just living with it.
The good news is that new cases in every state have now peaked, and early states (such as New York) are effectively back to pre-Omicron new case levels. As always, we are watching for new variants, but in the near term, the COVID situation looks much better.
This matters because COVID restricts labor supply and contributes to shortages and supply chain issues. It’s simple, but the less COVID there is, the better the economy should run. From Old Dominion CEO Greg Gantt: “From our perspective, this thing could be dying out. So hopefully, that’s happening everywhere. And I think if it is, that’ll sure be a boost to everything related to the economy and certainly to conducting business more as normal.”
3. Negative yielding debt is melting away
OK, we said we weren’t going to focus on the Fed, but the European Central Bank is fair game. Yesterday, Christine Lagarde noted that the bank’s inflation outlook was skewed to the upside, and didn’t rule out an interest rate increase this year. This sent bond yields across the Eurozone soaring, and the amount of global negative yielding debt plummeting.
The total market value of negative yielding debt is almost down to $6 trillion for the first time since 2018. It was over $18 trillion in December of 2020.
Opportunities in core fixed income have been few and far between for the last several years. But as yields continue to rise, it might start to get interesting for investors sooner rather than later.
4. The auto sector could be poised for a bounce
One of the most interesting industries in the world right now is autos. On the micro, reports suggest that Ford is set to spend around $20 billion to accelerate its ascent in electric vehicles, and it also just announced a deal with Sunrun to integrate its electric F-150s with solar power. Ferrari shares rose after shipments for its luxury cars rose 22%. General Motors noted that the semiconductor shortages that have been hampering sales could be close to an end.
Indeed, some macro data seems to support the notion that supply issues are getting better. German auto production data has been encouraging, and U.K. auto sales had a strong month. U.S. vehicle sales surged by 208,000 in January (the strongest month since May 2020, and one of the strongest of the last 30 years) to a 15 million vehicle annual pace. We think the auto sector could be an important source of upside for the economy after supply shortages depressed output in the sector throughout 2021.
5. The housing market seems to be powering through higher rates
Even though mortgage rates are at their highest levels of the pandemic era, there are little signs that the housing market is slowing so far. Mortgage purchase applications rose 12% this week, the fastest pace since last summer, and inventories are (according to Altos Research) even lower now than they were at last year’s April nadir.
The bad news is that while there may be some bright spots in the auto supply chain, the shortages of key housing components are still hindering completions (you can’t finish the house without a garage door or a microwave, or paint). In fact, the gap between new houses started and houses completed is the widest in close to 40 years.
To us, this suggests very durable demand for new houses that homebuilders cannot keep up with. This should support the housing market through the rest of the year, at least.
In all, these developments are certainly indicative of a vibrant cycle. The digital transformation of the global economy is maintaining momentum, even as the physical world reopens. Central banks are on the move to combat realized inflation (a dynamic not seen during the last cycle).
Demand for big-ticket durable goods such as autos and housing is strong, while consumer balance sheets remain solid. There are still many opportunities for investors, despite central bank tightening, but dispersion beneath the surface is likely to remain high.
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