Last Friday and Monday’s sell-off in the FAANGs (Facebook, Amazon, Apple, Netflix, and Google—or Alphabet) may have been the end of the recent mania for those high flyers, but I don’t believe it was the end of the bull market.
Late Friday afternoon, the Dow Jones Industrial Average and the Standard & Poor’s 500 index were within a whisker of their all-time highs, and the Nasdaq Composite index, which bore the brunt of the FAANG selling, was still only about 3% off its record peak.
The FAANGs, however, have remained subdued, except for Amazon which announced Friday morning it was buying Whole Foods Markets for $13.7 billion.
Instead of a major correction or bear market, I think we’re likely seeing rotation away from the super-momentum FAANGs and back towards the cyclicals, which led the so-called Trump rally.
Financial ETFs, for instance, have seen a big inflow of investor cash as some of the big Wall Street firms take profits on their holdings of the FAANGs and redeploy them to the sectors that set the pace between Election Day and early March.
Will it work?
It all depends on the shaky premise that the Trump Administration and the Republican-controlled Congress will be able to pass the so-called “pro-growth” agenda over which Wall Street did backflips after the election: tax reform, regulatory relief and infrastructure building.
That “Trump trade” ran out of steam in March, after the Republican-controlled House of Representatives couldn’t pass the first health care reform bill, throwing doubt on the president’s legislative initiatives.
A health care bill passed the House on its second try and now is stealthily working its way through the Senate. I think it has a decent chance of passage there, which will enable the Congress to move on to tax reform.
In theory. All the sources I read say tax reform may be too difficult, especially with a budget that needs to be passed and a debt ceiling—remember that?—that must be raised again, neither of which are chip shots in this deeply divided Congress.
So, we may have to settle for a tax cut, which would be good enough for Wall Street in the short run, but the “Trump trade” priced in a far more ambitious agenda.
Which brings us back to an economy that’s growing decently at best, with almost full employment and little inflation and wage growth but with a Federal Reserve determined to hike rates gradually and reduce its balance sheet regardless. Meanwhile, stock valuations are pretty high, considerably above expected earnings growth.
It all suggests a market that may grind its way higher in the months ahead but probably needs a decent correction before it can work its way to sustainable new highs.