Major FAANG Tank

Tech Earnings & COVID-19 Fears Tank Markets

The stock market fell because of tech earnings and COVID-19 cases spiking on Friday. With all the FAANG stocks cratering except Alphabet, we all wonder if there was some profit taking and some fear of rising rates. Oddly, even though stock investors fear a slowdown because of COVID-19 and worry a stimulus isn’t coming soon, rates are rising on the possibility of a cyclical upturn. 

As you can see from the chart below, rates are near their June peak again. They closed the day at 87.9 basis points which is above the peak earlier in the month. And they are now within striking distance of the June peak of 90.2 basis points.

A spike in rates might have been behind the coordinated crash in the FAANG stocks even though they mostly reported solid earnings. Obviously, Twitter was a disaster, but Facebook beat on the top and bottom line, yet it fell 6.3%. Usually, tech is the flight to safety trade because it outperforms in the COVID-19 economy. 

Pretty soon, we are going to see whether the bond market or the stock market is right about the economy. Personally, I think a stimulus and higher rates are coming. While cyclical value stocks haven’t crashed recently, they are pricing in a spike in cases without a stimulus. Either that, or traders don’t think a stimulus matters.

Details Of Friday’s Tech Crash

S&P 500 rose off its low, but still fell 1.21%. Nasdaq crashed 2.45% and the Russell 2000 fell 1.48%. Maybe the market is in a risk off mode, so it is selling everything. Maybe cyclical value stocks will recover these losses while secular tech continues to underperform. 

As you can see from the chart below, the financials and energy actually were up. Biggest losers were consumer discretionary and tech which fell 3% and 2.4%. Consumer discretionary was driven lower by Amazon which fell 5.45%. Tech was driven lower by Apple which fell 5.6%.

It’s an open question as to whether investors were universally disappointed by decent tech earnings or if they are afraid of higher rates. 10 year yield being below 1% isn’t scary. But investors might be anticipating a 10 year yield at 2%. That would be terrible for many money losing firms such as Fastly and Twilio which were down 7.1% and 3.33%. 

Small cap value index fell 78 basis points because the banks did well. Regional bank index was up 1.5%. Obviously, small cap value outperformed, but it’s still down 6.7% since October 23^rd. That suggests fear of a slowdown which doesn’t correlate with the rise in yields. 

Lower real growth and higher yields are consistent with stagflation, but we shouldn’t jump to conclusions like that. A decline in small cap value can easily reverse.

That crash in the story stocks that some have been predicting is finally here. Tesla stock fell 5.6%, putting it down 22.1% since its top on August 31^st. It's unlikely that it will ever surpass that top again. Draftkings fell another 5.3%, putting it down 44.5% from its record. Twitter fell 21.1% and Shopify fell 5.3%. It was a disaster for the weakest businesses.

Is The Market Oversold?

Overall stock market is oversold. There is a ton of fear in the market as investors anticipate a bad crash due to COVID-19. As you can see from the chart below, equity volatility is very high for us being this far away from a recession. However, this cycle is different because COVID-19 hasn’t been resolved. This is like in late 2008 when the banking crisis took months to resolve.

Clearly, fear doesn’t mean the stock market can’t fall further. Firstly, we aren’t at an extreme point; markets can gap lower in a crescendo bottom. Let’s now look at what can go right since the bear thesis is so obvious. There are many potential positive catalysts in the next 4 weeks. 

First one is a smooth election where the winner is easily discovered. There may be riots either way. Key is to remove uncertainty about the decision. If it’s clear, the riots won’t last. Second is positive vaccine news from Pfizer. Third is a stimulus after the election.

Fourth is the so-called 3^rd wave ending. People are very scared right now because they think cases and hospitalizations will spike throughout the winter. That implies worse hospitalizations and deaths than the spring. 

As you can see from the chart on the bottom right, this is the 3^rd wave. So far, this is the 3^rd lower peak in the hospitalization rate. This data adjusts for the few states that didn’t give results in the spring. As of now, we still aren’t in danger of a disaster. Let’s come back to this stat in 2 weeks and see if the wave is ending.

Amazon Earnings

Amazon reported $12.37 in EPS which beat estimates for $7.41. Sales were $96.15 billion which beat estimates for $92.7 billion. Plus, the firm gave strong guidance of between $112 billion to $121 billion which beat estimates for $112.3 billion. 

Midpoint is 28% sales growth. AWS sales growth was 29% which was in line with estimates and the same growth rate as last quarter. It should scare investors that the stock did so poorly on such good results. It means expectations are too high or that higher rates are a problem.

Conclusion

Stocks are oversold, but they could fall more. Many are still bearish on tech. If the positive catalysts discussed above come true, they will help small cap value much more than large gap growth. We could even see growth stocks fall in a rising market if yields spike enough. 

There will be a major sector and factor rotation when we get a vaccine for COVID-19 and a stimulus. Let’s wait 2 more weeks to see if the winter is going to be a disaster for COVID-19. Admittedly, on the surface, the recent data looks bad.