Something very odd is happening in the stock market. Despite the fact that rates look likely to rise and yields are rising sharply, financial stocks are losing ground. This is the opposite of what one would expect, as higher rates boost profit margins for banks and the like. No one is quite sure why, but it seems that instead of boosting hopes for earnings, higher rates have investors worried about a weaker economy to come, which would be negative for banks, which are quite tied to economic performance.
FINSUM: To us this is a quite a bearish view, as it indicates that investors see stagflation coming on (higher rates with zero or negative growth.
Go back a few years and the big fear of the wealth management market was robo advisors, especially upstarts like Betterment and Wealthfront. Fast forward to 2018 and fears of robos have largely receded as they seem to have found their niche in the industry alongside human advisors. Now the big worry is about large tech companies pushing into wealth and asset management. The anxiety most commonly manifests in worrying that Amazon might launch a digital wealth management platform of its own. However, Charles Schwab’s CEO just sent out a warning to the FANGS, saying that “If you’re a FAANG-type company and you decide you want to come into our space in a manner consistent with the way we operate, you will invite the Federal Reserve into every single thing you do”.
FINSUM: It is true that if the FANGS were to become full-fledged financial service providers they would suddenly be subject to much stricter regulations. It could be an obstacle that holds them off, at least for a while.
For all the worries about tech companies and the threat of regulations, one of the best supporting points for the stocks was the strength of their underlying businesses. Despite suffering some losses in share price over the last couple of months, Facebook showed yesterday why the FANGS still look like a good buy. Net income in the first quarter was up 63% versus last year to $5 bn. Earnings per share was up 25% versus estimates. Revenue also jumped 49% versus last year.
FINSUM: Despite all the controversies, Facebook’s advertising business continues to rake in cash by the truckload.
Bloomberg has just made a bold call—they say the bull market ended yesterday. While stocks dropped sharply, 1.7% for the Dow, which basically eliminates all the progress they had made over the last couple of weeks, it is hard to say that it means the end of the bull market. The reason Bloomberg argues so is that the market has been stuck in a rut for three months, and yesterday, investors digested a dark survey which showed that Americans, on average, expect stocks to be lower 12 months from now, a sharp turnaround in sentiment. One portfolio manager from Stifel Nicolaus summarizes where the market is now, ”Investors have this understanding that equity markets are at lofty levels and we are in a low-return environment, so as the risk-free rate moves higher, even in a gradual manner, that becomes more of a competitive asset class”.
FINSUM: We are not particularly bearish, but do concede that if rates keep moving higher it is going to be hard for equities to do the same.
Amazon is starting a new service. For the last year, the company has been trying to convince consumers that letting the company’s delivery people in their homes via a special service was a good idea. Now Amazon is taking that one step further with the launch of a program to deliver packages to customers’ cars. Like the home deliveries, and broadly under the same program, named Amazon Key, Amazon’s delivery people will deliver packages to cars parked in publicly available areas. The car will be unlocked by an OnStar (or similar) service and relocked after the delivery is completed.
FINSUM: We think this could be a very convenient feature for many people and may be an enticement to get more consumers to sign up.
There has been a lot of consternation over the last week about whether the Vix is being manipulated. In one incident last week, the Vix jumped significantly with no corresponding move in the stock market. The culprit apparently was a large options trade deeply out the money which shocked the benchmark. Following an investigation, the Cboe says that it was not market manipulation, but rather an order imbalance that caused the jump in the VIx’s measure. Speaking on whether the move amounted to market manipulation, the Cboe commented that “We reiterate that we believe these claims are without merit”.
FINSUM: Whether or not the market was being gamed, the bigger question is whether the the way the Vix is calculated is too fragile/sensitive. If a single trader with a moderately sized order can move the Vix this much, what does it say about the index?