Bob’s Journal

Stocks might be beginning one of their periodic rotations.

We could be seeing a shift from recent winners to recent losers. Another way to view the change is as a shift from growth stocks to value stocks.

For some time, a few sectors outperformed the market indexes, and a few of the stocks in those sectors did most of the work. The outperforming sectors, as I’ve pointed out in the past, have been technology and consumer discretionary. The top-performing stocks in these sectors are known as the FAANG stocks: Facebook, Amazon, Apple, Netflix and Alphabet/Google. In general, growth stocks have done much better than value stocks.

It is a little too soon to conclude that the change will be lasting, but since July 26, there’s been a sharp reversal. The stocks and sectors that performed best before July 26 suddenly are lagging the market. Those stocks that were the worst performers have been registering the best returns. This change is most apparent among the larger companies.

For example, technology now is the only sector trading below its 50-day moving average. It declined 3.00% in five days. Consumer discretionary declined 1.14% in five days. All other sectors are positive, though telecommunications was up only 0.11%. Energy was up 3.62% in five days and materials increased 2.10%.

Bespoke Investment Group produced an interesting study of July’s market action. It ranked the Russell 1,000 stocks in deciles of best performing to worst performing from July 1 through July 25. Then it compared how those deciles performed from July 26 through July 30. There’s almost a perfect mirror image. The best-performing decile returned 13.1% in the first 25 days of July, while the worst-performing decile lost 8.8%. But in the following five days, the former top-performing decile lost 2.8%, while the former worst-performing decile lost only 0.2%.

This might be a short-term phenomenon caused by investors rebalancing their portfolios. But it also could be that investors are making a longer-term move. They might be taking profits in the winners of recent years. That’s especially likely since some of those stocks, such as Facebook, now are generating disappointing numbers and negative headlines.

Investors also might be deciding that growth stocks have had their best days for a while. With the Fed tightening monetary policy and more economists warning about the potential for a recession in 2019 or 2020, it’s natural for investors to be seeking the relative safety of value stocks.

Tariffs and trade conflicts also could be a factor. There is some research concluding that companies that are less vulnerable to trade conflicts are doing better lately than others.

As I said, it’s early. But investors need to be watching, especially investors who have been concentrating in the best-performing stocks and sectors.

There doesn’t have to be a broad-based bear market for an investor to lose money. The market indexes can keep marching higher, while investors move money from yesterday’s winners to yesterday’s losers. A diversified investor still is likely to do well, but a focused investor who was doing well the last few years might do very poorly the next few years if the portfolio doesn’t change.

The Data

The Pending Home Sales Index from NAR, which covers only existing homes, increased by 0.9% after declining 0.5% last month and being flat most of 2018. Over 12 months, the index still is down 2.5%. We’ll have to see if this is a one-month wonder or the start of a new trend.

Home prices rose only 0.2% for the latest month, according to the S&P CoreLogic Case-Shiller Home Price Index. Prices are up 6.5% over 12 months. But the overall numbers don’t tell the complete story. Prices were flat to down in major cities such as New York, Chicago and Washington, D.C. But they continued to soar in Seattle, Phoenix, San Francisco and some other areas in the west.

The manufacturing sector remains strong, according to the Dallas Fed Manufacturing Survey. The survey’s General Index declined a little to 32.3 from 36.5. The Production Index component increased to 29.4 from 23.3. Most components of the survey were strong, and respondents indicated that prices and wages are moving higher.

The Kansas City Fed Manufacturing Index registered a 23. That’s down from 28 last month but still indicates strong growth.

The PMI Manufacturing Index shows steady growth continues in manufacturing. The index was 55.3, down slightly from 55.4. Recent growth might not be sustainable. Delivery times are at a record, and there was a sharp increase in costs being passed on to buyers.

The ISM Manufacturing Index declined to 58.1 from 60.2. That is a strong growth rate, and a decline was expected. Analysts conveyed last month’s level was unsustainable. Last month’s delivery delays were the longest in the survey’s history, and they are shorter this month.

Factory Orders had a healthy increase of 0.7%, compared to last month’s 0.4% rise. In addition, core capital goods increased 0.7%. This is considered a major measure of basic business investment. It is a little lower than the previous month and might be a sign that business investment will increase at a slower rate in the coming months.

The Chicago PMI also showed a growth increase. The index rose to 65.5 from 64.1. That is four straight months of increases for this index and the highest level since January.

The ADP Employment Report had another strong month. It indicated 219,000 new private sector jobs were created. Also, the previous month’s jobs number was revised higher to 181,000 from 177,000.

Consumer Sentiment, as measured by the University of Michigan, declined to 97.9 from 98.2. But it ended the month higher than the mid-month reading. The measure still is near the highs of the post-crisis period.

Consumer Confidence, as measured by The Conference Board, also increased to 127.4 from 127.1. Despite the strong number, there was a decline in the percentage of respondents saying they plan to buy a home in the near future. Also, those bullish on the stock market declined by 6 percentage points, while those bearish on the market increased 7 percentage points.

The Personal Income and Outlays report showed why consumers remain optimistic. Personal income rose another 0.4% for the month, following a 0.4% increase last month. The wage and salaries component of income also rose 0.4%. Spending increased 0.4%, and last month’s spending was revised higher to a 0.5% increase instead of a 0.2% increase.

Inflation was moderate in the survey. It increased only 0.1% in both the PCE Price Index and the core PCE Price Index. Over 12 months, the price indexes increased 2.2% and 1.9%, respectively. That provides little pressure for the Fed to tighten monetary policy faster than planned.

Last Friday’s report on gross domestic product (GDP) made a lot of headlines. The report indicated the economy grew at an annualized rate of 4% in the second quarter. That was the strongest level in years. But it also was likely overstated by some quirks. Household spending increased quite a bit after being unexpectedly weak in the first quarter. Plus, there was a surge in soybean exports as buyers sought to increase stockpiles before expected tariffs were imposed.

The GDP Price Index was 3.0%, also the highest in some time and well above last quarter’s 2.0%.

The GDP report is backward-looking, so it doesn’t tell us much about the present or future. Overall, there probably was some mismeasurement in the report. Based on the other data that came in during the quarter, the economy probably was in the 2.0% to 2.5% growth range. Growth also is likely to begin to slow as the effects of the tax cuts fade and the Fed continues to increase interest rates.

New unemployment claims rose only 1,000. The claims number remains near historic lows.

The Markets

The S&P 500 declined 1.11% for the week ended with Wednesday’s close. The Dow Jones Industrial Average fell 0.36%. The Russell 2000 lost 1.04%. The All-Country World Index gave up 1.00%, while the emerging market equities declined 1.27%.

Long-term treasuries declined 0.64% for the week. Investment-grade bonds rose 0.05%. Treasury Inflation-Protected Securities (TIPS) fell 0.09%, as high-yield bonds gained 0.31%.

On the currency front, the dollar rose 0.52%.

Energy-based commodities declined 1,79% for the week. Broader-based commodities fell 1.35% and gold lost 1.35%.

Bob’s News & Updates

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