social media stocks — Blog — Jill on Money [ Archive]

Nearly six years after the official end of the recession, something exciting is about to happen: Americans are likely to FINALLY get a raise! Government data (the Employment Cost Index or “ECI”) showed that compensation in the first quarter increased by 2.6 percent from a year ago, up from the 2.2 percent gain in the previous quarter and the fastest pace since Q4 2008. The private sector did even better, seeing an annual growth rate of 2.8 percent, the best year over year pay gain since Q3 2008. A year ago, the rise in private sector wages and salaries was only 1.7 percent, so while growth rates are still modest by historical standards, this report demonstrates good progress and is a sign of potentially more robust increases later this year. Joel Naroff of Naroff Economic Advisors predicts, “Within a quarter or two at the most, we should be back above 3 percent,” which is just about average for an expansion.

How can we square this upbeat information with the monthly jobs report category of “average hourly earnings”, which showed annual growth of just 2.1 percent in Q1 (and for the entire recovery)? Greg Ip of the Wall Street Journal notes, “The divergence may be explained by the fact that the quarterly figures include commissions and other performance-based pay, which rose sharply in the first quarter, and may not be repeated.” That may be true, but it should also be noted that the Fed has traditionally put more weight on the employment cost index, since it tracks the same jobs over time and adjusts for the changing mix of jobs in the economy. If Janet thinks ECI is the better gauge to use, then we should too.

Other indicators have enhanced the case for future pay raises: weekly jobless claims are hovering at 15-year lows; ISM Service sector indicators are strengthening; and a variety of big companies, including McDonalds, Wal-Mart, Target, Cheesecake Factory and Aetna, have all announced an increase in pay to lower wage workers.

We’ll learn more about the state of the nation’s labor market this week, when the government releases the April employment update. Economists are hopeful that the weak March report, where just 126,000 positions were created, was a one-off event, rather than a more worrisome trend that is gripping the nation. The consensus estimate is that 220,000 new jobs were created and for the unemployment rate to edge down by a tenth of a percent to 5.4 percent.

Happy Anniversary, Greek Bailout! Time sure does fly, when you bail out an indebted nation. It has been FIVE YEARS since Europe and the International Monetary Fund first agreed to bail out Greece (May 2, 2010). Eurozone officials are busy trying to hammer out yet another debt restructuring with Greece, which once again faces a summer default without a deal.

MARKETS: That thud you heard this week was the sound of plummeting social media stocks. Twitter, LinkedIn and Yelp all tumbled by more than 20 percent on the week, after weaker than expected earnings reports and dim prospects for the rest of the year. Social media stocks have been on a massive run and even with these three misfires, the social media index (SOCL) is up over 10 percent this year, 3.5 percent better than the NASDAQ Composite.

DJIA: 18,024, down 0.3% on week, up 1.1% YTD
S&P 500: 2108, down 0.4% on week, up 2.4% YTD
NASDAQ: 5,005 down 1.7% on week, up 5.7% YTD
Russell 2000: 1267, down 3.1% on week, up 2% YTD
10-Year Treasury yield: 2.12% (from 1.92% a week ago)
June Crude: $59.15, up 3.5% on week (up 25% in April, biggest monthly gain since 5/09)
June Gold: $1174.50, down 0.03% on week
AAA Nat'l avg for gallon of regular Gas: $2.60 (from $2.51 week ago, $3.69 a year ago)

THE WEEK AHEAD:

Mon 5/4:

Cablevision, Comcast

10:00 Factory Orders

Tues 5/5:

Zillow

8:30 International Trade

10:00 ISM Non-Manufacturing Index

Weds 5/6:

MetLife, Prudential, Whole Foods

8:15 ADP Private Sector Jobs

8:30 Productivity

Thurs 5/7: UK Election

Zynga

3:00 Consumer Credit

Fri 5/8:

AOL

8:30 April Employment Report

“Why did the market drop?” asked the radio anchor, after the market’s nasty drubbing on Thursday. My response was simple, “There were more sellers than buyers.” Sometimes, there is no particular reason for a sell-off. Sure, financial talking heads love to gin up explanations, but at the end of a rough session, sometimes simplicity works. For the past six weeks, a slow wave of selling has hit the once high-flying sectors of the market, pushing many components of the NASDAQ into a bear market (a drop of more than 20 percent from the recent peak). The NASDAQ Biotech index (NBI) is down 21.1 percent from its February 25^th closing high; the Global X Social Media ETF (SOCL) has dropped 21.5 percent from the March 6^th closing level; and the NASDAQ Internet index (QNET) is not quite in bear market territory (down 16.8 percent from March 6^th), but its close enough that you get the point.

Meanwhile, the NASDAQ and the Russell 2000 are flirting with corrections (a drop of more than 10 percent), down 8.2 and 8 percent respectively since their early March highs. The broader S&P 500 is down just 4 percent from its all-time closing high reached on April 2^nd. The big question is whether the selling represents the start of another technology-led total market meltdown? It’s not clear yet, but a review of the numbers is helpful to determine where markets stand.

The stocks that have seen the steepest declines also enjoyed the biggest run-ups. For example, prior to its recent sell-off, the Biotech Index saw an 87 percent gain over the prior 12 months. Even with the 21 percent sell-off, the index is still UP by 35 percent from a year ago. Of course that doesn’t mean that the selling will abate, which is why many are looking for clues from 14 years ago, when the dot-com bubble imploded.

In 2000, investors were coming off a long expansionary economic period and a huge bull market, which had driven up the valuations of stocks. According to Birinyi Associates, the S&P 500 was trading at 29 times its component companies' earnings for the prior 12 months. Today, The S&P 500 trades at 17 times earnings, slightly above average but well below those 2000 levels. The highflying sectors are indeed stretched, but not nearly as much as they were in 2000. The S&P 500 biotech index trades at 29 times component companies' earnings, which is above its median of 26 but far below the level of 57 at which it traded in 2000.

What appears to be happening is that investors are wising up a bit: taking their profits from the stocks that churned out big gains over the past year, paying their due to Uncle Sam and then rotating the proceeds into more value-oriented large stocks. In a world where emotions often rule the day-by-day action, that process seems positively rational.

MARKETS:

DJIA: 16,026, down 2.4% on week, down 3.3% YTD
S&P 500: 1815, down 2.7% on week, down 1.8% YTD
NASDAQ: 3999, down 3.1% on week, down 4.2% YTD (biggest weekly percentage loss since the week ending June 1, 2012)
10-Year Treasury yield: 2.63% (from 2.73% a week ago)
May Crude Oil: $103.33, up 2.3% on week
June Gold: $1318.10, up 1.2% on week
AAA Nat'l average price for gallon of regular Gas: $3.63 (from $3.56 a year ago)

THE WEEK AHEAD: Earnings season kicks off in earnest, with low expectations for S&P 500 company earnings. Profits are expected to drop by 1.2% from the same quarter a year ago, according to FactSet Research, which would be the first contraction since the third quarter of 2012, though Thomson Reuters is slightly more optimistic, projecting growth of 1.1%. Revenue is seen rising only 2.3%.

Mon 4/14:

American Airlines, Citigroup

8:30 Retail Sales

10:00 Business Inventories

Tues 4/15: TAX FILING DEADLINE!

Charles Schwab, Intel, JNJ, Coca Cola, Yahoo

8:30 CPI

8:30 Empire State Manufacturing

10:00 Housing Market Index

Weds 4/16:

Abbott, American Express, Bank of America, Capital One, Google, IBM

8:30 Housing Starts

9:15 Industrial Production

2:00 Fed Beige Book

Janet Yellen to speak at Economic Club of NY

Thurs 4/17:

Blackrock, DuPont, General Electric, Goldman Sachs, Morgan Stanley, Pepsi

8:30 Weekly Jobless Claims

10:00 Philly Fed Survey

Fri 4/18: US MARKETS CLOSED IN HONOR OF GOOD FRIDAY

(Markets also closed in Australia, Brazil, Canada, Hong Kong, Singapore, and the UK)