When Growth Slows & Profit Margins Narrow, Share Prices Plummet, Especially As The Fed Tightens
With this morning’s 3Q18 U.S. GDP report of +3.5% growth locking the Fed into tightening interest rates further in 1Q19, high duration securities (i.e. high P/E, no-yield stocks like the majority of the FAANG names) face a valuation headwind that is only exacerbated by missing analyst expectations and ramping up spending which only serves to pressure profit margins. That said, their operational bias towards a seasonally strong 4Q bias may put a floor under their shares, but until Fed tightening cycle ends expect investors to reallocate to lower P/E total return names (e.g. AAPL, INTC, MSFT).
Social Media Names Face Their Own Idiosyncratic Regulatory Issues, Clouding Prospects Further
Bad enough that Fed monetary tightening is changing the valuation equation negatively, social media names, FB & TWTR & to some extent GOOGL, continue to be subject to regulatory scrutiny both at home and abroad. The possibility of the Democratic Party gaining control of the House of Representatives in the November 2018 U.S. mid-term election raises the prospect of increased regulatory oversight. Hence, within the tech sector, it may be prudent to reallocate away from such names whose business model is coming increasingly under review.
Stay With Total-return Tech For Growth With Better Duration Characteristics
While there has been a sector rotation underway since early October away from Tech and into Staples as investors seek out lower volatility and more certainty as to expected growth, investors in the interest of diversification should not exit the Tech sector entirely. As mentioned above, there are names that continue to have solid growth prospects offering attractive returns at current levels. So, keep a long-term perspective and rebalance appropriately.