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November 23rd, 2018

The end of the bull market?

By PRATTE

Bear Bull EN

After a bloody October, investors expected a break in November. Unfortunately, the markets continue to fall while some of the favourite stocks such as Apple and Facebook plummet. Is this the end of the bull market? Unless you have a crystal ball, impossible to know for now. Stocks from the FAANG group collectively lost more than $1 trillion in market value earlier this week. This is their biggest drop since reaching their highest peaks. On Tuesday, crude oil prices lost more than 6%, bringing shares of major oil companies down. Here is what happened in the markets this week.

Markets Brief

Another difficult start to the week for the markets! On Monday, Wall Street fell, and the three leading indexes retreated. “This is mainly a sinking of technology stocks,” said Peter Cardillo of Spartan Capital. Apple share lost more than 4% at the close, as most technology stocks plummeted; Netflix closed down 5.5%, Facebook by 5.7%, Amazon 5.1% and Alphabet 3.8%. Nvidia lost more than 12%, being strongly affected by the decline of Apple. The Dow ended the day down 1.56% while the Nasdaq weakened by more than 3%.

Tuesday, Target’s shares collapsed 13.3% after earnings that fall short of analysts’ expectations. Its fall and the decline of Apple led the three main indexes down. They remained negative throughout the day and Apple ended the day down 4.78%. The price of crude was down 6% came to weigh on the oil companies, ExxonMobil and Chevron who respectively lost 2.84% and 2.78%.

The rebound in tech stocks and oil prices came in support of the top three indexes on Wednesday. Apple was up 1.4% while shares from the FAANGs were, for their part, slightly up. Investors are worried about the slowdown in global growth, leaving some doubt about the longevity of the bull market that has been going on for the last ten years. US stock markets were closed on Thursday for Thanksgiving. Thursday, Wall Street was closed for the Thanksgiving holiday in the United States. Friday, the markets have once again opened slightly lower, pulled down by the fall in oil prices. A shortened session for the day ending at 13hrs.

The TSX also started the week down, falling 84.49 points on Monday. Tuesday, the Canadian index has opened down, led by the decline of 5% of the barrel of oil, to finally close the day down 200 points. The TSX opened higher on Wednesday, helped by rising oil prices. While US markets were closed on Thursday, the Toronto Stock Exchange ended down 3.44 points despite an increase in the energy sector with a lower transaction volume than usual, only 83.3 million shares traded. TSX opened lower on Friday, pulled down by the drop in oil prices. The Toronto index has declined 8% since the beginning of the year.

Apple

Monday, news revealed that the company had restricted its orders for the production of its latest models of phones, which were unveiled this year. This announcement made Wall Street tumble. The iPhone maker lost more than 23.7% Tuesday since its last high. This is a loss of more than $222 billion in stock market value since its highest peak on October 3. Goldman Sachs slashed its Apple price target on Tuesday. The firm said in a note there is a “weakness in demand for Apple’s products in China and other emerging markets,” as well as a disappointing reception for the iPhone XR model.

Nvidia, a semiconductor company providing Apple is greatly affected by the company’s recent setbacks. Indeed, it has lost more than 51% since its last summit. Nvidia was one of the most successful in the S & P 500 and this downgrade weighs on the index. Nvidia’s stock lost nearly 30% after posting disappointing results last Friday. Apple, however, managed to resume some feathers Wednesday, opening with a slight increase of 1.4% but closed down 0.1%.

FAANG

On Monday, the group of FAANGs (Facebook, Amazon, Apple, Netflix and Google’s parent company, Alphabet) collectively lost more than $1 trillion in market value since their highest peaks. Facebook is down 40% since reaching its peak on July 25th. Amazon, for its part, lost more than a quarter of its stock market value since September. However, for the last five years, Netflix and Amazon have both recorded total returns of 476% and 328% while Facebook has a 202% return over 5 years. Which still puts things in perspective.

The group’s shares have been the favourite stocks of the last decade and their recent fall has a major impact on the indexes. “They are now victims of massive sales after being massively bought,” said Patrick O’Hare of Briefing. “The concerns of a general slowdown, a high valuation, and a harsher regulatory environment is weighting,” he added. Facebook and Alphabet are down for the year while Facebook has been in negative territory for a few months. Alphabet, for its part, became the second major technology company to be in the negative on Monday. However, the other three stocks in the group are still up for the year. FAANG’s shares were slightly up on Wednesday, Amazon (+1.4%), Facebook (+1.8%) and Alphabet (+1.3%) finished the day with gains.
Oil
Black gold also went through a painful week. On Tuesday, the price of oil fell 6%, despite recent efforts by OPEC and its partners to adjust prices. In recent weeks, too much supply is weighing on prices as demand continues to decline. The barrel of oil has fallen by 30% since its last summit last October while Brent fell by 27% from its most recent peak.
The United States, Russia and Saudi Arabia have increased their production even reaching pumping records. The portfolio managers have sold the equivalent of 553 million barrels of crude oil and fuels over the last seven weeks, the largest reduction since at least 2013. Tuesday, the 6% drop in oil prices affected oil companies as investors are increasingly concerned about the forecasts for economic growth. A decrease in production by OPEC and its partners is to be expected in order to avoid an overabundance of supply. Oil prices were down to their lowest level on Friday, on course for their biggest one-month low since 2014.

The Stock Market Selloff

What is happening to the markets? Is this the end of the bull market? The FAANG, the champions of the bull market, have lost more than 20% since their recent highs. “The bearish mini-market that began in the first quarter of 2018 is not over because prices have yet to adjust to the change in the rate system and the moderation of profits,” writes strategist Michael Hartnett. The Dow has recorded a decline of 2,500 points since October. In addition, the latest selloff of the stock market has cancelled all market gains for the year.

Many factors explain this sudden decline. For example, rate hikes by the Federal Reserve are responsible for the increase in borrowing costs. This situation affects, among other things, housing and auto markets that are sensitive to credit. Investors fear that the Fed might be causing a recession in the United States. In addition to these increases, earnings from large companies are weaker than expected, while we cannot ignore the trade tensions. The economic slowdown had a direct effect on stocks that are sensitive to economic fluctuations, such as Boeing, who lost more than 10% during the month and Caterpillar, which dropped more than 22% this year. Many investors still believe that markets should rebound in the second half of 2019. Goldman Sachs slashed its Apple price target on Tuesday. The firm said in a note there is a “weakness in demand for Apple’s products in China and other emerging markets,” as well as a disappointing reception for the iPhone XR model.

 

Pratte Portfolio Management is registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).

This newsletter is solely the work of the author for the private information of clients. The views (including any recommendations) expressed in this newsletter are those of the author alone, and are not necessarily those of Pratte Portfolio Management.

The information contained in this newsletter is drawn from sources believed to be reliable, but the accuracy and completeness of the information is not guaranteed, nor in providing it do the author or Pratte Portfolio Management assume any liability. This information is given as of the date appearing on this newsletter, and neither the author nor Pratte Portfolio Management assume any obligation to update the information or advise on further developments relating to information provided herein. This newsletter is intended for distribution in those jurisdictions where both the author and Pratte Portfolio Management are registered to do business in securities. Any distribution or dissemination of this newsletter in any other jurisdictions is prohibited. The holdings of the author, Pratte Portfolio Management., its affiliated companies and holdings of their respective directors, officers and employees and companies with which they are associated may, from time to time, include the securities mentioned in this newsletter.

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