Black Monday anniversary + why this year is different

This week marks the 30-year anniversary of “Black Monday”—the stock market meltdown that occurred on October 19, 1987. It was the biggest ever single-day percentage decline with the DJIA (Dow Jones Industrial Average) falling 22.6%. What makes that day so significant is that is happened around the anniversary of October 28th, 1929, the original “Black Monday” stock market crash that ultimately led to the Great Depression.[1]

October has gotten a bad rap for being one of the most feared months—not only is it a time when people are encouraged to scare each other, it’s also been a time that is historically bad in finance. Since 1987, there have been seven stock market crashes that have occurred in October.[2] While this may instill some panic for investors, there are many reasons to believe that this year is quite different from 1987.

Prior to the DJIA’s major crash in 1987, the S&P 500 was up almost 40% year to date. But even despite the 22% setback, the S&P 500 still finished positive, up 2% for the year.[3]

While this year has also seen an unprecedented run in the stock market, with new highs being reached consistently, much of this is attributed to positive earnings reports. Earnings growth in the last year can be tied to two factors: companies are arguably more efficient, and stock buybacks from many large corporations. Since 2010, it’s been estimated that companies have collectively spent over $3 trillion on stock buybacks. Stock buybacks can inflate earnings in the short-term, as corporations will use company cash to buy their own shares, thus creating a positive attitude towards trading. Also, historically low interest rates makes stocks more attractive when compared to bonds, which will have low yields. At the time in 1987, bond yields were much higher and seemed more appealing/less risky than a stock market with stretched valuations.

There are three major reasons why this year is different than 1987:

  1. Technology changes: in 1987, it was a relatively new concept to have computer systems that could make large-scale trade orders. As the market fell, stop-loss orders were triggered at a rapid pace, causing a domino effect that dragged the market further down.[4]
  2. Regulation changes: after the 1987 crash, the Securities and Exchange Commission (SEC) implemented “circuit breakers” that trigger a market-wide trading halt if it detects a decline of 10%, 20%, and 30% in the DJIA. These rules ensure more stability in the market in times of overreaction.
    1. Similar to the market-wide trading halts the SEC implemented for large declines in the major market indices, the SEC also mandated trading halts for any stock that that starts trading outside of a specific range based on recent prices. Therefore, if a significant drop is detected in a stock’s price, trading is temporarily stopped.
  3. Using history to guide trading strategies: We are also more aware of the history following major market declines. Below is a table of the S&P 500 after Intraday Drop of 7% or more going back to 1987. You can see that the index tends to wildly outperform 1 year after a major down day.[5]

Graph SP 500 7 percent drop

Source: Schaeffersresearch.com

So while a major run in the stock market can at times precede a major correction, more efficient technology, stronger regulation, and a more tactful trading strategies are just some of the measures taken to safeguard and help subside negative effects in times of market chaos.

 

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

 

[1] https://seekingalpha.com/article/4113726-black-monday-30th-anniversary-forget-history?page=2

[2] http://www.investopedia.com/articles/financial-theory/09/october-effect.asp

[3] http://www.schaeffersresearch.com/content/analysis/2017/10/17/black-monday-anniversary-a-look-at-stock-market-meltdowns

https://www.forbes.com/sites/aalsin/2017/08/09/how-stock-buybacks-cause-economic-stagnation-a-qa-with-robert-ayres-and-michael-olenick/#4315109316dd

[4] https://finance.yahoo.com/news/could-1987-stock-market-crash-050919703.html

[5] http://www.schaeffersresearch.com/content/analysis/2017/10/17/black-monday-anniversary-a-look-at-stock-market-meltdowns

Equifax Data Breach: How to protect yourself

The credit reporting agency Equifax had a massive data breach that occurred in mid-May, one of the largest hacks ever according to some cybersecurity experts.[1] The breach went on through July until the company learned of it on July 29th . At the time, they were not aware of the scope of the hack, or how many people were affected. As it turns out, up to 143 million people may have had their personal information exposed: names, birthdays, addresses, Social Security Numbers, drivers license numbers, and even credit card numbers were leaked, making those affected hugely susceptible to identity theft. The company is blaming their software for the hack

The effect is pretty disheartening, considering such a large company that holds some of the most important information could allow the breach to happen, let alone happen for almost 3 months. As far as the risks associated with potentially having your information leaked, identity thieves can spend on credit cards, take out loans in your name, and take out other lines of credit under your name that make you liable for massive debt. Criminals could also assume control of your existing accounts to steal your money if they can get access to pin codes and passwords. It’s up to each person to keep an eye on their credit to ensure they aren’t a victim of identity theft, but there are other steps you can take to see if you are one of the 143 million affected and how to protect yourself. We advise everyone to act now and determine if they are at risk; because Social Security Numbers don’t expire, your information could be at risk to be stolen now or 10 years down the line.

To see if you were potentially affected by the leak, you can go to  https://trustedidpremier.com/eligibility/eligibility.html and type in your last name and the last 6 digits of your Social Security Number. It will give you an immediate answer whether you may or may not have potentionally had your information exposed. Your next best bet, regardless if you were possibly affected, would be to contact your primary bank and look into identity fraud protection programs. Because of the high demand right now, they may be running specials and discounting new sign-ups. If you do not plan on purchasing a house or car, and/or do not plan on opening up any new credit cards, you can also get a credit freeze. A credit freeze prevents creditors from accessing your credit report, so credit, loans, and other services in your name will not be approved without your consent. Originally, there would be a fee charged for placing a credit fee but from now until November 21st, Equifax is allowing free credit freezes. Go to https://www.freeze.equifax.com/Freeze/jsp/SFF_PersonalIDInfo.jsp to register. You can also lift the freeze at any time to apply for new lines of credit. And to ensure there isn’t any suspicious activity going on in your accounts, keep an eye on your credit report; if there is anything you do not recognize, take action quickly.

As always, you can call our office for more information and assistance in dealing with this crisis at 216-313-9999.

[1] https://www.cnbc.com/2017/09/13/us-senator-on-equifax-hack-somebody-needs-to-go-to-jail.html

2017 US Mobile App Report

By now we are all pretty much aware of the disruption that digital media has created in journalism, politics, education, and so much more, towards a paperless society. Digital media encompasses any media that is accessed through a digital electronic device: from reading articles, to playing videos, streaming music, playing games and even educating, almost everything can be accessed online now[1]. In 2017, 57% of all digital media engagement is driven through mobile apps, according to the 2017 US Mobile App Report from comScore[2]. The company tracks digital audiences on their use of desktop computers, smartphones, and tablets, as well as mobile web and app audiences. This report explores the behaviors of mobile media consumption and gives context to how that industry has evolved and how it keeps growing.

The report specifically targets “Mobile”, which refers to smartphone and tablet devices. In 2017, Smartphone apps alone (therefore, not including tablet apps) drive over half of all digital media usage. This is in comparison to the mobile web, where anything can be accessed but apps specifically tend to have more feasibility. Apps also dominate mobile web in terms of usage time: while 87% of time accessing digital media is spent on mobile apps, only 13% of time spent accessing digital media is through the mobile web.

Millennials continue to adapt to mobile trends to a point that questions if mobile apps can truly be addictive. The report finds that younger users between ages 18-24 spend more than 3 hours a day on apps. And they don’t just drive the consumption of mobile apps, they help drive their revenue. A survey shows that millennials are much more willing to spend money on downloading apps and are also more willing to make purchases within an app then their older counterparts.

So with so many apps available now, what makes people discern which apps to keep and use most frequently? It turns out that looks matter: according to the report, 21% of millennials will delete an app if they don’t like how it looks on their home screen. And distance matters, too. Millennials are more likely to consider “thumb reach” method when positioning apps on their screen, so as to make their most frequented apps as convenient as possible to access with one hand.

There is also a reported increase in the amount of people who allow apps to send “Push Notifications” in 2017, which are messages that pop up on mobile devices for updates on certain apps. Last year, there was a sense that “push notification fatigue” had started, with less users allowing them. The most notable increase in mobile app usage came from apps that categorize as “news/information”. It is possible that with so many news-worthy events happening in the last year, the increase in users allowing for push notifications indicates a desire to stay connected to the latest news.

The top 10 most used apps are ranked in the chart below. Of those ten, Facebook and Google combine to own 8 of the most used apps. Facebook in particular has the highest amount of users among all mobile apps:

most used apps chart

Source: comScore.com

With mobile engagement becoming more prevalent, the stock market has reacted as well: FANG, the acronym for large-cap tech stocks (Facebook, Amazon, Netflix, and Google) have led the way for the market’s bull run. In fact, Goldman Sachs reported that the top-5 companies in the tech sector in terms of gains have contributed about 40% to the S&P 500’s overall gains for the year[3]. Despite the slight pullback in June in the tech-heavy Nasdaq 100 Index and high valuations in the sector, there hasn’t been much resistance to their growth. Mobile app usage is at all-time highs and there is seemingly no end to their usefulness. As mobile tech continues to develop, it’s becoming clear that mobile devices will soon be applicable to every aspect of life, and companies will need to continue to evolve to the consumers demands.

 

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

[1] https://thecdm.ca/program/digital-media

[2] https://www.comscore.com/Insights/Presentations-and-Whitepapers/2017/The-2017-US-Mobile-App-Report

[3] https://www.cnbc.com/2017/06/12/tech-stocks-tank-but-these-investors-are-still-bullish.html

 

Earnings data proving to have almost no impact on market performance

Earnings Season has been highlighted by positive numbers as of late in the S&P 500: 4Q16 saw total earnings at an all-time high and 1Q17 carried the momentum with double-digit earnings growth. As it stands, reports for 2Q17 have yielded yet another double-digit year over year earnings growth while on pace to set another total earnings record. In 13 years, this is the highest percentage of companies reporting earnings results that beat both top and bottom line analyst expectations.[1] But despite the promising results in company earnings, it seems that these numbers have little to no impact on a stock’s relative performance to that of the S&P 500.

The chart below shows the one- day relative performance of a stock after reporting earnings that beat both top and bottom line estimates and the one-day relative performance of a stock that missed on both top and bottom line estimates. Basically, it tracks how the average company that beat earnings expectations compares to the performance of the S&P 500 and how the average company that missed expectations compares:[2]

earnigngs data chartLooking at the yellow line, companies that missed both top and bottom line earnings estimates have had a 1-day relative performance of about -3%, meaning that the average company reporting poor earnings results will see negative performance compared to the benchmark index (in this case, the S&P 500)[3]. This is somewhat normal and about the average performance for that category of stocks in the last 17 years. What is abnormal is that companies who are beating both top and bottom line earnings estimates (blue line) are having a relative 1-day performance of 0. In theory, companies beating analyst forecasts should be outperforming the benchmark (S&P 500), but for the first time since 2000, these positive reports are only keeping performance in-line with the benchmark.[4] Why aren’t these stocks performing better and in turn, bolstering the market even higher?

It’s possible that earnings beats were already priced into the market, which explains why these numbers haven’t garnered a reaction in their performance. The market has been mostly flat in the last few months, but positive earnings results are definitely doing their part to keep the S&P 500 and DJIA near all-time highs. Right now, everything boils down to politics and it seems to be the only real driver behind market performance. While there has certainly been a lot of talk of things to come, we will wait to see if and when government takes real action in tax-reform, the debt ceiling debate, and foreign affairs to see a significant reaction in the market.

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

[1] https://www.zacks.com/commentary/124249/q2-earnings-season-brings-all-around-strength
[2] http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:price_relative
[3] http://www.barrons.com/articles/a-whole-lotta-nothing-dow-gains-just-25-points-hits-9th-straight-high-1502143313
[4] http://www.businessinsider.com/stock-market-today-earnings-season-share-moves-smallest-since-tech-bubble-2017-8

Big banks pass the Fed’s Stress Test

The Federal Reserve released the results of their annual stress tests on the nation’s biggest banks, and the positive impact can be a turning point in the stock market. Amid concerns that banks would not have enough capital to endure another financial crisis a la 2008, the results came through with flying colors and for the first time in 7 years, all 34 financial institutions passed[1]. The rigorous examination tests the stability and strength of these banks to withstand a severe recession. Each bank is put through a hypothetical scenario of harsh economic conditions– such as 10% unemployment or a GDP growth rate of -10.6%[2]. Regulators then determine whether the banks have enough capital to survive such conditions, as well as their ability to measure and manage risk when paying dividends or buying back shares.

Behind the positive results however, looms the ongoing campaign from the Trump Administration to reduce regulation. The Fed determines the minimum level of capital that banks must hold, and to pass these tests, banks must hold even more capital than they are required. With unemployment under 5% and GDP growing at 2%2, the tests in extremely dire situations can beg the question that the Fed’s capital requirements are perhaps too high. The Trump Administration campaigned on the premise of decreasing the Fed’s regulation, arguing that high capital requirements hinder bank’s ability to lend to small businesses and homeowners. This view differs greatly from Fed Governor Jerome Powell, who indicated that the Fed intends to further increase regulation and minimum capital requirements for the eight largest banks. In fact, recent data suggests that bank lending has increased to all-time high levels for commercial and industrial loans.[3] However, about 50% of loan applicants received smaller loans than requested, indicating that the conservative and risk-averse nature of bank lending is hurting the growth of younger and less proven applicants.

While the Fed will ultimately decide what direction capital requirements go in the future, investors can take comfort knowing that banks are strong enough to lend to households and business, even during a recession. Banks are now eligible to raise their dividends and buy back shares, which may help attract more investment in the future. Investors and shareholders of big banks can expect to see higher payouts in the coming weeks.

bank loan graph

Source: CNN Money

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.
[1] http://money.cnn.com/2017/06/28/news/economy/fed-stress-test-wall-street-results/index.html
[2] http://www.cnbc.com/2017/07/03/the-trump-administration-not-the-fed-has-it-right-on-bank-regulation-commentary.html
[3] http://money.cnn.com/2017/02/13/investing/bank-business-lending-dodd-frank-trump/index.html?iid=EL

Has tech’s run-up in the market ended?

Early this week, technology shares saw a sell-off across the sector after an analyst downgraded Apple (AAPL) stock from Buy to Neural.[1] Prior to the pullback, investors already had growing concerns about a potential “Tech-Bubble” reminiscent of the Dot-Com bubble of 2000, which would eventually result in a crash that disrupted the entire stock market. [2] These concerns were somewhat muted when the decline in the sector that has carried the stock market to all-time highs in the last year did not influence a wider market selloff.

The tech sector has become increasingly popular, mostly due to the performance of FAAMG, the acronym given to the Tech Giants that have dominated the US stock market: Facebook (FB), Apple (AAPL), Google-owner Alphabet, Amazon (AMZN), Microsoft(MSFT) Corp, and Google owner Alphabet (GOOGL). The Los Angeles Times has reported that the technology component of the S&P 500 alone was up 18% this year.2 The chart below shows how these 5 powerful companies have become the key drivers in major indices:

FAAMG chart

Source: Business Insider

But popularity can also indicate an over-crowded trade, and the fall on Monday is what can happen once these shares lose their momentum. The past few years have seen a steep rise in the technology sector and any amount of disruption can be brutal for shareholders.

However, even despite the run-up, the most powerful companies in the sector have recorded lower volatility than any other sector in the last 6 months, according to the Research Team at Fidelity Investments.[3] These are companies that people interact with daily; the fact that the tech sector’s biggest names are well-established and highly-profitable should dispel any fears of a dot-com-like bubble. Some might even view a pull-back as “healthy”, potentially allowing for more growth in the future.

It’s hard to imagine the FAAMG companies falling out of favor anytime soon, even with the new Trump Administration’s proposed trading policies that could impact tech companies specifically by imposing a border tax that could hurt profits.[4] But for now, investors shouldn’t sweat a 1 or 2 day move into the red for technology companies. Technology shares bounced back in Wednesday’s pre-market trade, and the short-term negative move can be seen as a small correction to a sector that has had a spectacular run.[5]

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

[1] http://www.nasdaq.com/article/close-update-wall-street-weighed-down-by-tech-sector-cm802337

[2] http://www.latimes.com/business/la-fi-markets-20170522-story.html

[3]https://eresearch.fidelity.com/eresearch/markets_sectors/news/story.jhtml?storyid=201706131450MRKTWTCHNEWS_SVC000421&provider=MRKTWTCH&product=NEWS_SVC&category=sectorNews&gic=45

[4] https://www.thestreet.com/story/14001605/1/these-are-the-trump-policies-that-would-hurt-tech-companies-like-apple-the-most.html

[5] http://www.nasdaq.com/article/technology-sector-update-for-06142017-msft-aapl-ibm-csco-googl-nok-mvis-cm803192

Athleisure’s Impact in the Retail Sector

Lululemon (LULU) stock slipped by more than 20% on Thursday after posting Q4 earnings for 2016 that missed expectations and gave a bleak outlook for the first fiscal quarter of 2017[1]. The brand that helped pioneer the “Athleisure” trend has seen less traffic in both their stores and on their website, partially due to the new-found stiff competition– and a dismal outlook provides an opportunity for their competitors to grow even more. So is the Athleisure trend dying, or is the market just oversaturated with leggings in the apparel industry?

Athleisure is a term that refers to active wear that is suitable for both exercise and everyday life, as described by Merriam-Webster dictionary.[2] The words Athletic and Leisure are antonyms that have been combined to create the newest phenomenon in fashion.  Hoodies and leggings are not only trendy, but appropriate for places outside of the gym, and their popularity has all but cemented the style’s place in the retail sector. Much of this is due to the cultural shift of increased health awareness, and driven by millennials who made it cool to wear joggers and sneakers to the office. Nike’s CEO Mark Parker confirmed this shift at the 2014 Women’s Innovation Summit, proclaiming that “Leggings are the new denim.”[3] Starting with companies like Lululemon, the trend of wearing leggings and yoga pants anywhere created its own niche in the market place by filling in a gap: clothes that are functional were now also stylish. The trend caught so much buzz that luxury fashion brands even showcased their expensive version of street clothes on the runway. Suddenly, price points ranged from basic Nike tees for $30 to Alexander Wang’s cashmere sweatpants for $295.

In an otherwise lagging apparel industry, which has seen low sales growth at 2% in 2015, active wear stands out, with a 16% increase in sales that same year.  Without the boom in athleisure trend, it was estimated that the industry would have declined by 2%[4]. But in the short span of about a year, athletic-based retailers such as Sports Authority and Quicksilver have filed for bankruptcy, and now Lululemon and Under Armour have seen sales-growth decline along with their stock prices. Yet despite these setbacks, athleisure doesn’t seem to be losing its popularity anytime soon; the trend is representative of a lifestyle shift with health and comfort as its main priorities. The decline in sales for these companies is likely do to an over-stretched market— from Wal-Mart to Lululemon to Alexander Wang, now enters the era of celebrity-based collaborations with athletic aesthetic top of mind (Stella McCartney with Adidas, Beyoncé with Topshop, etc.). The focus on fashion-forward active wear will leave many brands in the dust if they don’t continue to adapt to changing trends that appeal to their customers. Gym clothes are the uniform on the street now, whether they are worn for athletics or leisure.

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

[1] http://finance.yahoo.com/news/lululemon-lulu-plunges-q4-earnings-110711100.html

[2] https://www.merriam-webster.com/words-at-play/athleisure-words-were-watching

[3] https://www.nytimes.com/2016/03/17/fashion/nike-fashion-olympics.html

[4] https://www.forbes.com/sites/greatspeculations/2016/10/06/the-athleisure-trend-is-here-to-stay/#b244f7428bd4

US Household debt at highest level since 2008

The New York Federal Reserve’s quarterly report contained some startling news: household debt in the US totals $12.58 trillion, which means Americans are in nearly as much debt now as they were at the peak of economic turmoil in 2008 when household debt was at a record high of $12.68 trillion. Between the third and fourth quarters of 2016 alone, debt increased by $226 billion.[1]

Student loan debt is particularly alarming, as it increased by $31 billion in the fourth quarter of 2016. This isn’t particularly shocking, since college tuition has soared, but it’s a figure that many college graduates may not be in a position to pay off. Credit card debt is rising at a faster percentage, but whether people are living beyond their means, or just incurring more debt and managing can only be answered in the coming years.

While credit card debt and student loans are a factor, much of the debt is attributed to home and auto loans. Mortgage originations are at their highest levels since the Great Recession of 2008, and auto loan originations are at a record high, indicating that banks are more willing to extend credit. This might ring a bell to 2008, when banks overextended loans

While those numbers may spell out doomsday, it should be noted that the number of households in the US expands every year, therefore it can be assumed that debt would increase as well. [2] So considering that there were 125.82 million households in 2016 to 116.78 million in 2008 softens the blow a bit. Additionally, despite the increased debt, bankruptcies and foreclosures were at an 18-year low. Still, the huge spike in household debt in 2016 alone is a cause for concern, and the New York Fed doesn’t expect things to slow down in 2017, where we may just see record high levels of household debt.1

us-household-debt

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

[1] https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2016Q4.pdf

[2] https://www.census.gov/quickfacts/table/PST045216/00