Has the proverbial “shift of power” — a.k.a. portfolio rebalancing — begun within the equity markets? More importantly, what should value-hunting investors do about it?
On Friday, driven by a sharp rise in industrial stocks, the Dow Jones Industrial Average logged its second straight all-time high. The blue chip index added 75.67 points, or 0.3%, to close at 26,732. This comes after the Dow, which on Thursday also notched all-time high — its first since late January. However, the S&P 500 SPX and the tech-heavy Nasdaq edged lower. The former declined 1.08 points, or 0.04% to close at 2,929.67 after the index on Thursday posted its first record since Aug. 29.
Nasdaq, however, home to internet heavyweights such as the FAANGs — Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Google (GOOG , GOOGL) — fell 41.28 points, or 0.5% to close at 7,986.96. On a weekly basis, the Dow was the biggest winner, ending 2.3% higher, while the S&P 500 added about 1% and the Nasdaq shed 0.3%. It’s worth noting, despite the weakness in tech, Nasdaq is just 2% below record levels
On balance, the markets remain resilient. Investors have come to realize, despite a constant barrage of of trade rhetoric between the U.S. and China, nothing trumps improving economic data — many of which suggests that stock valuations are rightfully supported by strong economic fundamentals. Last Thursday's jobless claims number, underscoring the strength of the labor market, was the lowest level seen in five decades.
Then there’s the Index of Leading Economic Indicators, which suggests we could be on the verge of a 3% economic growth in the second half of the year. If that’s the case, are there reasons to sell out of equities? That would not be my strategy. Indeed, the market will continue to experience up-and-down swings. But amid the portfolio rebalancing, there’s persistent evidence that the overall trend will be (or should be) higher, not lower.
Despite escalating tensions between the U.S. and its trade partners, corporate earnings and revenue growth are as high as they’ve ever been. So, while stock valuations are pretty high, is there any fundamental reason to worry that stocks — commensurate to rising revenue and earnings — are at record highs? Next week, investors will receive more data to support sustained signs of economic strength.
On Monday the Chicago Fed national activity index (CFNAI) will come out at about 8:30am. The weighted CFNAI, which consists of an average of 85 economic indicators, covering production and income, employment, personal consumption, housing etc., will provide a glimpse of how overall consumer activity and related inflationary pressure. The Case-Shiller home price index, which measures the value of residential real estate in 20 major U.S. metropolitan areas, comes out on Tuesday. This is followed by new home sales on Wednesday, weekly jobless claims on Thursday and Personal income data on Friday.
All told, as long as the earnings trend remains positive, the long-term trajectory of stocks will remain favorable. In that vein, here are a couple of stocks to keep an eye on for this coming week.
Nike (NKE) - Reports after the close, Tuesday, Sept. 25
Wall Street expects the company to earn 62 cents per share on revenue of $9.93 billion. This compares to the year-ago quarter when earnings came came to 57 cents per share on revenue of $9.07 billion.
What to Watch: Nike stock closed Friday at $85.85, just shy of an intra-day all-time high of $86.04. The shares have climbed 36.77% year to date and have risen 16.5% in three months. It would seem the company’s calculated bet on its recent Colin Kaepernick ad is paying off. There are now reports that polarizing quarterback will once again play in the National Football League. And he could sign with a team as soon as “next week.” Analysts on Tuesday will have many interesting topics to talk about.
BlackBerry (BB) - Reports before the open, Friday, Sept. 28
Wall Street expects the company to earn 1 cent per share on revenue of $209.38 million. This compares to the year-ago quarter when earnings came to 5 cents per share on revenue of $249 million.
What to Watch: Can revenue continue to rise? The company believes it has an enormous opportunity to services customers in need of device security as the number of connected devices grow over the next several years, especially given the rate at which cyberattacks on mobile and traditional devices have grown recently. But Blackberry still has a long way to go to earn Wall Street’s trust.