Stock Market Commentary for 5/11/2021:
- + Value & Cyclical Stocks: Cyclical value stocks continue to outperform high-growth tech shares. Rising inflation expectations and a rebounding economy should continue to favor: Financials, Energy, Industrials, Utilities, and Materials.
- – Growth Selloff: High growth technology shares led the market lower on Monday. Expect these stocks to slump if inflation goes up, and rally if inflation goes down.
- Stock Talk:
|The Winner of the Day: Coinbase|
|Coinbase has been along the same wild ride much of the cryptocurrency market has lately. Elon Musk’s appearance on SNL over the weekend surely impacted the stock. Additionally, the volatility in Bitcoin’s price has given Coinbase some headwind. Today, it seems as if Ethereum’s all-time high gave the stock some momentum.|
|What’s Moving Pre-Market: Everbridge ($EVBG) ↑ | Virgin Galactic ($SPCE) ↓|
|The Loser of the Day: The Trade Desk|
|$TTD beat earnings and revenue estimates, and announced a 10:1 stock split. So why the awful day? It appears that much greater growth aspirations were already figured in to the stock’s valuation. The posted results were too little for investors to want to stick around for more.|
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Top Investment Story #1: Big Tech Plunges
What is Happening?
All five of the tech mega-caps (Facebook, Apple, Amazon, Microsoft, Alphabet) traded lower on Monday, as they faced analysts’ downgrades and a reality check by economic fundamentals.
Why Does This Matter?:
These 5 stocks make up 21% of the S&P 500 Index (500 largest publicly traded companies in the U.S.). This means that if the top 5 have a bad day, the market has a bad day. Let’s review the causes for the selloff:
– Economic Headwinds: Tech mega-caps are highly sensitive to interest rate changes. Case in point, “As yields rose sharply from November through March, [the five stocks] underperformed the S&P 500 by 7 percentage points.” Case in point, if inflation takes off and interest rates rise, these stocks could be in trouble.
– Political Pressure: Recent Biden Administration appointments suggest possible risk of a stricter regulatory regime and tighter antitrust enforcement. With the exception of Microsoft, big-tech faces investigations over their market power and competitive practices ranging. Some items under scrutiny include commercial litigation, DoJ and FTC antitrust lawsuits, and Congressional probes.
– Wall Street Downgrades: Facebook and Alphabet were downgraded on Monday by Citi analyst Jason Bazinet, on concerns that the Street is too bullish on the outlook for online ad spending. – read more here
– Breaking News: More than 40 attorney generals asked Facebook to abandon plans to build Instagram for kids, which is designed to target children under the age of 13. The public outcry highlights social media’s dilemma – how can they grow revenue and users without facing backlash?
Big tech fueled the stock market rally for years; however, changing economic and political landscapes could make future growth more uncertain for these giants.
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Top Investment Story #2: Energy Shakeup
What is Happening?
Activist Investor Elliot Management Corp. has taken a stake in Duke Energy ($DUK: 2.86%). The announcement comes at a time where utilities are under scrutiny from the public eye.
Why Does This Matter?
Utilities have been making headlines! Albeit, mostly for bad reasons. Recently, Colonial Pipeline was targeted by a hacking group, causing the largest pipeline in the country to pause operations. Prior to that, Texas dominated headlines as severe winter storms rendered the state’s electrical grid useless. Going back just a bit further, one may remember activist investor Carl Icahn, taking two seats on First Energy Corp.’s board after the firm settled a bribery scandal.
Duke Energy, the $79B North Carolina-based firm, grabs the latest headline. Duke services approximately 8 million Americans for electrical services across multiple states. Duke also provides natural gas to about 1.6 million customers in Ohio, Kentucky, Tennessee, and the Carolinas.
Duke Energy is the owner of approximately $55B in long-term debt, and the company watched its debt rating slowly tumble over the course of a few years. It appears that Elliot Management has already begun to correct the course for the firm.
Elliot Management Corp. has made a name in getting premium performance from domestic utilities. With the sector under the critical eye of the public lately, perhaps Elliot takes charge and leads Duke to the height of its industry in terms of protocols and preparation? It is unclear how large Elliot’s stake is at this time.