Belaboring the Payroll Report
At first glance, what some investors thought might by a perfect U.S. labor report for January met with a resounding thud in financial markets Friday. It seemed to be one without so many jobs created that the Fed would be forced into raising rates at an uncomfortably fast pace, yet a report that was still strong enough to reinforce the notion of forward progress in the economy. Unfortunately, it ended up being another data point that investors viewed as the glass half empty.
Notwithstanding the world’s largest economy adding 151,000 net nonfarm jobs last month, blue-chip stocks are retesting their recent lows as investors fret about waning expectations for global economic growth and earnings. Will the Fed cast a blind eye to the increasingly easy money policies of Europe and Japan? Will it ignore the struggles that China’s leadership is having managing its economy to a soft landing? We don’t think so. We believe the Fed will respond as it did back in September following China’s surprise currency devaluation – it will defer further rate hikes that otherwise might happen if the U.S. dollar weren’t the transmission mechanism of global monetary policy.
A Toothless FANG
As money managers continue soldiering through an earnings season that has had its fair share of hits and misses, nothing better exemplifies its mixed nature than what has happened with the growth darlings of 2015. Facebook, Amazon, Netflix and Google (the FANG stocks) have declined by an average of 15 percent so far this year, roughly doubling the underperformance of the broader market. Investors were impressed with the accelerating mobile advertising growth reported by Facebook, as well as the strong ad revenues generated by Google parent Alphabet, from both its YouTube property and the search engine. On the other hand, Netflix’s premium valuation has failed to resonate with investors disappointed by the company’s waning U.S. subscriber growth. Amazon’s stock has been similarly punished for reporting both top and bottom line misses for its fourth quarter results.
We continue to believe that the U.S. economy will expand this year, that the trade-weighted dollar will moderate, and that oil prices will recover. If we are correct, then the narrow, growth-stock led market that investors experienced last year should broaden to lift the stock prices of attractively valued companies in lagging sectors such as energy and the financials. As communicated in our 2016 Investment Outlook presentations, we advise investors against chasing the “hot dot” growth stocks like Amazon and Netflix, and express our belief that the seven-year-old bull market is not over.
Our Takeaways from the Week
- Concerns about economic growth are permeating financial markets
- We continue to foresee earnings growth and higher stock prices in 2016