We are still about three weeks away from First Quarter Earnings announcements. In absence of any real fundamental data the market will trade from day to day on current headlines. Over the last few years, the market has shrugged off the headlines knowing the economy was still growing and the Fed would protect that growth. As we get further through the business cycle, the markets are paying closer attention to news headlines and as of late, there has been plenty of news to make the markets nervous.
The biggest headline in the last two weeks involves social media giant Facebook and the use of data by Cambridge Analytica. This news has raised concerns of increased regulatory oversite for Tech companies including Facebook, Twitter and Google. On Monday, the Senate Judiciary Committee asked Facebook CEO Mark Zuckerberg to appear before Congress. Mr. Zuckerberg has not formally accepted the invitation, but it appears he’s inclined to do so, as his social-networking company faces intensifying pressure over policies that allowed data on up to 50 million to be transferred to an analytics firm tied to President Donald Trump’s 2016 campaign.
Testifying before Congress after scandal can be a high-wire act for any CEO, and a congressional hearing is generally the last place any chief wants to be. Mr. Zuckerberg, who has never given public congressional testimony, has been invited to an April 10 hearing where, if he attends, he can likely expect a grilling from lawmakers on both sides of the aisle.
The hard part in such a setting is balancing the various constituencies a CEO has to address: the lawmakers in the room, who have the authority to impose new regulations on the industry; the company’s customers, Facebook’s more than two billion users in this case, who can be turned off by what they hear; and the company’s shareholders, who want to see their chief fend off additional pressure to the company — and its stock price. Tech stocks are suffering one of their worst beatings in years as investors reassess a sector that faces the prospect of greater regulatory scrutiny.
CEOs have weathered congressional grilling before. In the fall of 2016, Heather Bresch, the head of Epipen-maker Mylan, endured scathing criticism from House members of both parties, several of whom accused Mylan of profiting excessively from a relatively inexpensive drug that patients’ lives depend on. “I am a very conservative and pro-business Republican, but I am sickened by what I’ve heard,” Rep. John Duncan (R., Tenn.) said at the time. Ms. Bresch still has her job.
Wells Fargo’s John Stumpf wasn’t so lucky; he went to Congress in September 2016 as public and congressional pressure mounted on his bank for allegedly illegal sales practices across the company. By October, he was out. Mr. Zuckerberg’s future at Facebook is not currently in question, and he has publicly committed to rectifying the issue. So what exactly do lawmakers want from the tech CEOs who were asked to testify? Along with Mr. Zuckerberg, Sundar Pichai, chief executive of Google, and Twitter's Chief Executive Jack Dorsey were also invited to Capitol Hill. One possibility: to send another signal that Washington’s hands-off approach to tech is over.
Sen. Mark Warner of Virginia, the top Democrat on the Senate Intelligence Committee currently probing Russian meddling in U.S. elections, suggested at a reception in Washington this week that Congress wants to see the firms show a greater effort to protect consumer data. “Companies like Facebook and Twitter and Google are American icons. ... I don’t have any interest in regulating them into oblivion,” Mr. Warner said. “But as they’ve grown from dorm-room startups into media behemoths with enormous reach and influence, they haven’t acknowledged that that kind of power comes with responsibility.” He added: “I expect these platforms to work with us in Congress so that together, we can take steps to protect the integrity of our elections and our civil discourse in the future.”
This will play out over the next few months and may continue to put preassure on Tech companies. The good news is that rotations like this in the market usually position the market to move higher and to broaden the ralley in companies that may have been ignored by investors simply focusing on the Tech sector the last few years.
The fundimentals of the market and economy are still in good shape. Today, the US Economy as measured by GDP for Q4 was revised up today from 2.5% reported last month to 2.9%. We believe once Q1 corporate earnings season gets here in a few weeks, the market will once again focus on the good earnings and economic growth that should be driving market performance. Until then, the markets will drift up and down based on headlines that seem to point to a change in regulation in Tech companies.
Source: Wall Street Journal
We will keep you updated as things develop moving forward. Please contact us with any questions you may have.