Looking at March, we observed 43% of its trading days experienced a spread of greater than 400 points between the day’s high and low. With spread between the market’s high and low at 743 points on March 1st and 737 points on March 27th, it’s apparent market volatility has returned. The VIX (volatility index) measured 19.97 (slightly ahead of its 20-year average of 19.4) on the last trading day of March. From reports published by the Investment Company Institute (ICI), we can see money flowing into and out of equities like a yo-yo on a weekly basis.
Using Benjamin Graham’s quote again, we reiterate, “the stock owner should not be too concerned with erratic fluctuations in stock prices, since in the short term the stock market behaves like a voting machine, but in the long-term acts like a weighing machine.” The constant inflow and outflow of investor money indicates to us that investors are not sure which way to vote in the short-term.
Presumably, much of this market volatility is related to two or three key items:
- The new Fed President, Jerome Powell, and his position on rates.
- The tariff debate and renegotiation of foreign trade.
- Facebook’s use of personal data (and the US Probe into Facebook).
While each of these items is important, and should be considered in terms of its potential impact on markets and economies, we would say current fund flows are more indicative of knee-jerk reactions than a thoughtful approach to investing.
Why? Because thus far we haven’t seen any surprises from Powell. It appears he will manage the Fed based upon the data, as his predecessors have done. And with respect to the tariff debate, despite the fear of a significant global trade-war (in large part being fueled by the media), data suggests it may not be that big of an issue. On March 23, 2018 Reuters published:
China's premier pledges market opening in bid to avert U.S. trade war
Premier Li Keqiang said China and the United States should maintain negotiations and he reiterated pledges to ease access for American businesses, as China scrambles to avert a trade war.
Then on April 4th with the markets having calmed (and conveniently the day before the Shanghai Exchange closed until April 7th for the Ching Ming Festival) China announced its plans for counter-tariffs. On April 5th, Trump announced he is now seeking $100bln in tariffs against China (due to the threat of additional tariffs against the U.S.). On the news of increased tariffs, the U.S Markets sold off again on April 6th, while the Shanghai exchange is conveniently closed. Interestingly, after the bold announcement of new potential tariffs (and the ensuing market selloff), Larry Kudlow (Pres. Trump’s new top economic advisor) reiterated the U.S. wants to continue to negotiate with China. It will be interesting to see what happens in the Chinese markets when they re-open. We would point out that since the tariff discussion began on March 1st, the Shanghai SE 50 Index is down 6.5% (through April 4th), whereas the Dow Jones is only down 1.3% during the same time frame. Today’s drop leaves the Dow Jones Industrial Average down 2.6% since March 1st, still well ahead of the Shanghai Exchange 50.
Though much of the U.S. Media is intently focused on discussing the backlash (and the dire consequences they say it may have on the US economy) that will follow from China, the market may be indicating China has more to lose in this fight than we do. Also, the comments from China, the market's movements, and the adjustments being agreed upon with our other trading partners seem to suggest we WILL NOT end up with a global trade-war.
We would further point out that China has been pushing to be a more globally recognized superpower. They have been pushing to have their currency more widely used in global trade, they’ve been cleaning up their shadow banking system, they’ve been building new modern cities, universities, and manufacturing capabilities. China has also been building up its Navy and military forces. While China may privately agree Trump’s proposal may not be unreasonable (and then again maybe they don’t), China politely accepting Trump’s tariffs could potentially undermine their mission of becoming a globally recognized superpower. This would explain the constant back and forth between China and the U.S. This does not mean a deal won’t be reached. It just means it’s likely to be a bumpy road until a deal is reached.
And in relation to Facebook, it seems inevitable that they will face higher regulation, but that doesn’t mean they are going away. They are still one of the most visited places online, and they have been very successful with their advertising revenue. Facebook's stock price will adjust with their revenue and user growth. They are not the first tech company the public has disapproved of (for a time), and they are not the first tech company to face higher regulation. The current events remind us of the probes into Microsoft by the Federal Trade Commission in the 1990s.
On March 13, 1991 the New York Times published a story that MSFT was being investigated by the FTC to determine whether or not Microsoft was abusing the powers of a monopoly. By March 22, the stock was down over 7%. Through July 25, 1991 the stock moved up and down, ending where it had begun. Then after July 25, 1991 Microsoft began producing impressive gains, with the stock up 80% by March 13, 1992 (one year later). Then, with the debate over Microsoft being a Monopoly raging on, the stock moved up and down without maintaining its momentum. The FTC remained deadlocked on the issue in July, 1993, and in March, 1994, the stock began to move again, and by March 13, 1995 MSFT was up 208% from where it began on March 13, 1991. During this period the S&P 500 was up 47%. What drove Microsoft's price? It was Microsoft's earnings.
Facebook is not Microsoft, and Facebook's use of user data is not a discussion about monopolies, and we are not proclaiming Facebook will continue to dramatically outperform the overall market. We don't share this example to say what WILL happen with Facebook, but rather to illustrate that it is too early for anyone to know what will happen with Facebook. What we can say now is that their earnings look good, and the market's current reaction to the news can only be described as fear. If Facebook is able to continue to grow its earnings and increase its share of advertising revenue, then its value in the market should increase. If current events cause Facebook to lose revenue, then the price should fall. Going back to the fundamentals, the question we ask now is if all the companies who advertise on Facebook pull away from them, where will they deploy those marketing dollars, Google? Perhaps, but we must remember companies were looking for another productive place to spend marketing dollars outside of Google because they already spend so much there. As for now, for those who own the stock, we'd recommend a wait and see approach. And for those who are considering adding to it, we'd recommend dollar cost averaging into the position and maintaining a LONG-TERM OUTLOOK.