The last week of April saw the beginning of some pessimism and the likelihood of a season downturn in the market. This was confirmed on Mayday, when large-cap stocks fell nearly a percent amidst concerns that slow or negative revenue growth were signs of a macroeconomic slowdown. Then the trend reversed on May 2 and stocks shot northward with strong expectations causing a market rebound.
A Mixed Macro Era
The upward movement in stocks was felt across the market, with large-cap and small-cap alike being lifted by the rising tide. The Dow Jones was up near a full percent to erase Mayday’s losses, and small-business, main-street oriented companies were the biggest winners, such as Build-A-Bear Workshop (BBW) and Yelp (YELP) leading the pack with 33% and 27% gains respectively. This jump was largely the result of a couple of strong macroeconomic indicators. Firstly, joblessness is going down; a day after the ADP reported lower payroll growth than expected, the Labor Department announced that unemployment applications fell modestly and unexpectedly, putting into question the bad news from ADP on the 1st.
Bolstering this better job market is news that people are buying more cars. Manufacturers reported an 11% growth in car sales in April, as noted by AP News on the 1st. Car sales are usually an economic indicator because new cars are the kind of thing that people buy only when they feel confident that the economic environment is improving. Indeed, Bloomberg’s own consumer confidence index rose to a 5-year high on the 2nd, seemingly confirming the sense that people are feeling financially more secure, which usually results in more spendthrifts and, in turn, more economic activity resulting in more growth.
Earnings Focus: High Tech and High Finance
To demonstrate the lumpiness of the economy, looking at recent earnings calls in two sectors shows just how much potential there is to win (or lose) by picking sectors carefully. On May 2, Facebook (FB) showed stronger than expected revenue growth and strong earnings despite a 60% quarter-over-quarter increase in expenses. The stock surged over 5.5% the next day, but the strong
performance on somewhat mixed numbers also drove a number of other web-based tech companies higher. Pandora ( P) saw a 2% rise in prices after spiking above $15, AOL was up 5%, and Yahoo (YHOO) rose 2.75%. Google (GOOG) rose a modest 1% to near its 52-week high and LNKD rose 3.5%, but fell over 10% in after-hours trading despite beating revenue and EPS expectations on the news of lowered guidance going forward – a warning sign for a fast-growth company. Still, the stock is up around 60% YTD.
Contrasted with the strong performance in these web-based high-tech firms, the bond-connected mREIT market was crushed on Wednesday as both American Capital Agency (AGNC) and American Capital Mortgage Investment (MTGE) posted big losses and saw 6% declines in after-hours trading. Big REIT firms Chimera Investment (CIM) and Annaly Capital (NLY) saw sympathetic slides. The losses in these specially-designed companies could result in dividend cuts and further losses, meaning the REIT market will be challenged when trading starts on Friday.
Such varied performance demonstrates the value of diversification to shield against the risk of a sector-wide decline, but it also shows an interesting conceptual development: at least short-term, capital-focused companies with low barriers to entry are getting hit while high-tech information-based firms are flourishing despite intense scrutiny, competition, and high expectations. Going forward, we may see another sector win as America takes the slow road to recovery, and investors will have to decide what that sector will be.