Dow climbs in early Friday action as Wall Street attempts to cap tumultuous trading week with an upswing


Stock benchmarks on Friday rose modestly higher as investors looked to close out a volatile, holiday-shortened week that has the tech-heavy Nasdaq Composite on track for its biggest weekly loss since the height of the pandemic-induced market selloff in March.

How are major benchmarks trading?

The Dow Jones Industrial Average
DJIA,
+0.19%

rose 117 points, or 0.4%, to around 27,650, while the S&P 500
SPX,
+0.07%

gained 14 points, or 0.4%, to trade at 3,353. The Nasdaq Composite Index
COMP,
-0.09%

climbed 48 points, or 0.5%, at 10,952. But all three benchmarks were trading off their intraday peak near the open, highlighting the week’s choppy action.

The Dow on Thursday fell 405.89 points, or 1.5%, to close at 27,534.58, while the S&P 500 ended with a loss of 59.77 points, or 1.8%, at 3,339.19. The Nasdaq Composite fell 221.97 points, or 2%, to finish at 10,919.59. Through Thursday, the Dow was down 2.1% for the week, while the S&P 500 was off 2.6% and the Nasdaq was 3.5% lower; markets were closed Monday for Labor Day.

What’s driving the market?

A decline in the S&P 500 index for the week would mark the benchmark’s first back-to-back weekly drop since May.

“While monetary policy is set to remain supportive for several more quarters, valuations are high across assets and volatility is resurfacing,” said Elia Lattuga, co-head of strategy research at UniCredit Bank, in a note. “The breadth of the rally is still limited and the recovery uneven—hence developments in the economic outlook and political risks represent significant threats to risk appetite.”

Stocks were unable to follow through Thursday on a Wednesday bounce that saw equities recover somewhat from a three-day, tech-led rout that pushed the Nasdaq into correction territory, falling more than 10% from its record close set last week.

Weakness on Thursday was partly tied to the inability of U.S. politicians to agree on a new coronavirus rescue package after Democrats blocked a Republican bill on the Senate floor, leaving the way forward unclear, analysts said.

Meanwhile, investors have fretted that the sharp rally that took stocks from their March pandemic lows to new all-time highs had left valuations significantly stretched for the large-cap, tech-related stocks that had led the rally this year. Among those highfliers, shares of Apple Inc.
AAPL,
-0.85%

 and Netflix Inc.
NFLX,
+1.22%

 were on track for weekly declines of more than 6%, while Facebook Inc.
FB,
-0.57%

 is off more than 5%.

In U.S. economic news, the consumer-price index for August rose 0.4% last month, beating average economists’ estimates for a rise of 0.3% but falling below the past two months at 0.6%. On a year-over-year basis, the CPI increased 1.3% after gaining 1.0% in July, the Labor Department said on Friday

Looking ahead, Federal budget figures for August are due at 2 p.m. Eastern.

Which companies are in focus?
What are other markets doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
0.675%

 rose 0.4 basis point to 0.687%. Bond prices move inversely to yields.

The ICE U.S. Dollar Index
DXY,
-0.12%
,
which tracks the performance of the greenback against its major rivals, fell 0.1%.

Gold futures
GCZ20,
-0.08%

were off 0.3% at $1,958 an ounce, threatening to snap a three-day winning streak. The U.S. crude oil benchmark
CL.1,
-0.10%

 fell 16 cents, or 0.5%, to $37.13 a barrel.

The Stoxx Europe 600 index
SXXP,
-0.11%

 was edging 0.1% lower, while the U.K.’s benchmark FTSE
UKX,
-0.26%

rose 0.2%. In Asia, Hong Kong’s Hang Seng Index
HSI,
+0.78%

and the Shanghai Composite Index
SHCOMP,
+0.78%

 both rose 0.8%, while Japan’s Nikkei
NIK,
+0.73%

rose 0.7%.



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Vanguard Mid Cap ETF: Cheap Valuations And High Quality (NYSEARCA:VO)


In this world nothing can be said to be certain, except death and taxes. – Benjamin Franklin

The Vanguard Mid Cap ETF (VO), a fund that is focused on mid-cap US stocks, has not been loved in recent years. It has had an impressive Covid-recovery, finally turning positive for the year, but remains below all-time highs made in February. Of course, this is not new for mid-cap investors. In the last three years, despite overwhelmingly positive equity markets and a risk-on sentiment, mid-caps have outperformed large caps, as measured by the Vanguard S&P 500 ETF (VOO). And by a significant amount, with a gain of 47.29% for the latter in the last 3 years to a gain of only 29.38% for the former.

Looking at the holdings of the ETF, the top 10 holdings account for only 8.1% of the portfolio, as much of the company-specific risk has been diversified away. Sector-wise, the holdings are balanced, with the top 3 sectors being Technology (21%) Financials (20.6%), and Industrials (15.3%). That gives a nice balance to the ETF in growth industries and value industries, which lets you hedge out the bet on which strategy will win out over the long term after more than a decade of growth stocks flourishing. Eventually, value investing can return, and you will have exposure to those types of companies with this holding.

Source: Vanguard

Thoughtful Selections

While the Covid crisis has many challenges for the mid-cap space, the portfolio has some excellent picks. For example, Lululemon Athletica Inc (LULU) is in a unique position, as their demand has likely increased with more consumers looking for comfort while working from home, a trend that the athleisurewear company has been excellent at capitalizing on. DexCom Inc. (DXCM) recently smashed earnings expectations in late July, with revenues gaining 34%, and earnings up a whopping 541%. SBA Communications (SBAC) managed to keep their dividend and beat FFO by $0.45, also beating on revenues, in their recent earnings report as more internet was used during the stay at home period. These, among other mid-cap plays, are extremely interesting in the ability to pivot and capitalize in a poor economy and should rebound stronger if the economy can continue its up leg.

Potential Risks

  1. If the economic recession is worse than thought, mid-caps may not have enough resources to weather the storm. Bankruptcies have been happening at an increased rate, especially when you go down the capitalization ladder, and could pose trouble throughout the rest of 2020 and into 2021, especially if government stimulus fails to gain traction in Congress. Many of these companies depend on a strong consumer.
  2. The dividend yield of VO could be under pressure here, especially if there is some movement on the political side to halt buybacks and shareholder payouts. While this remains a far-off risk, it is not implausible, and should be discounted as a risk when investing in these companies. With balance sheets that are inferior to larger-cap companies, there could be more pressure to keep free cash flow for future economic pullbacks and/or business pressure, lowering the dividend yield.
  3. This holding has 357 holdings currently, with a median market cap of $18.9 billion. While you are not going to be worried about diversification, you may suffer the effect of over-diversification with that many holdings. There have been studies done that say the proper amount of holdings for accurate diversification should be around 20-50 holdings only – at 357, the number is much higher.
  4. General market risk remains high after a Federal Reserve (Fed) fueled rally in 2020 off the March lows. If the Fed fails to stoke inflation, or they do not provide enough stimulus, stock markets are at risk of another major pullback. We saw some of this in the price action in early September, when tech stocks spurred a significant decline.

The ETF VO, and its underlying holdings, have shown a great ability to weather a downturn in the recent months. Although valuations remain elevated, at 25.3x P/E, the earnings growth rate of 13.7% should make up for that level over time. This is a great fund to get domestic exposure, as its foreign direct exposure remains 0%, and with a relatively low turnover of 15.2%, you should be comfortable holding this ETF long term.

While highly diversified, there are enough excellent ideas within the portfolio that can push the ETF to new highs, eventually. Whether the overall economy and markets remain in their uptrend is a huge question, but if you are looking for a 10- to 20-year investment, VO fits the bill. The nimbleness of mid-caps should allow them to adjust to the new normal economy, and if there is progress on a vaccine in late 2020 or early 2021, many will flourish.

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Asia stocks up as China PMI, U.S. data help cap strong quarter despite virus woes By Reuters


© Reuters. FILE PHOTO: A man wearing a protective face mask walks past the Singapore Exchange

By Stanley White and Alun John

TOKYO/NEW YORK/HONG KONG (Reuters) – Asian shares advanced on Tuesday as positive economic data from China and the United States helped to close out a strong quarter, though a renewed surge in global coronavirus cases underlined a challenging investment climate.

MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.51%, on course for its highest quarterly gain in nearly 11 years.

However, it was not clear whether the optimism would carry over into European trading, with EUROSTOXX 50 futures losing 0.7%, futures shedding 0.36%, and E-Mini futures for the S&P 500 down 0.24%.

Asian markets got an early boost after an official survey on China’s vast factory sector showed activity quickened last month, defying expectations for a modest slowdown. That came on top of strong U.S. housing market data overnight, which helped drive up Wall Street stocks despite a worrying surge in coronavirus cases in the country and around the world.

The Chinese factory data lifted its blue chips which jumped 0.82% to their highest level since mid March.

Still, most analysts cautioned against getting carried away by the factory data, noting that export orders were still contracting.

“The divergence of the domestic recovery and foreign orders contraction highlights that the Chinese economy remains affected by the global situation for the Covid-19 pandemic,” ING analysts said in a note.

“As new infection cases globally continue to grow, we believe that China will continue to face a contraction in export orders in the coming months.” 

The headline numbers, however, were enough to cheer markets.

Shares in Australia were also up 1.43%, Korea jumped 1% and Japan rose 1.33%, despite a larger-than-expected decline in Japanese industrial production.

Hong Kong stocks tacked on a more modest 0.1%, giving up much of the sizable early gains as investors came to terms with the Chinese parliament’s passage of a security law that will increase Beijing’s control over the former British colony.

The move has sparked international condemnation and caused the U.S. to begin steps to remove the territory’s special status.

On the whole, Asia ex-Japan shares were on course for a 17.8% gain in the second quarter, which would be the biggest quarterly increase since the third quarter of 2009. Stocks appear to have received an added boost as some investors adjusted positions on the last trading day of the quarter.

However, despite the bounce and underscoring the scale of the pandemic-sparked rout earlier this year, the index was still set for a 7% decline since January 1.

“Overnight moves in markets were not large but one does get the distinct impression that markets have got it both ways – with equities rallying on rebounding data and bonds rallying on dismal COVID-19 news,” said ANZ Research analyst Rahul Khare.

The strong housing data boosted the up 2.32%, and the S&P 500 up 1.47%

The yield on benchmark was little changed at 0.6299% in Asia as traders braced for U.S. non-farm payrolls data on Thursday, which is forecast to show an improving labour market.

However, the yield on U.S. five-year treasuries dropped slightly to a record low of 0.271%.

U.S. Federal Reserve Chairman Jerome Powell on Monday said the outlook for the world’s biggest economy is “extraordinarily uncertain” and signalled more monetary stimulus may be necessary, which could limit gain in yields.

A recent resurgence in coronavirus infections had led some investors to question the strength of a rebound in global economic activity, with sentiment swinging between hopes and fears.

The bulk of new cases were reported in the United States and Latin America, stoking fears that the outbreak could stall economic recoveries just as lockdowns begin to ease.

In currency markets, the dollar was mixed in the Asian session swinging between small gains and losses against a basket of currencies.

The greenback was a touch up at 107.64 yen, having touched a three-week high of 107.885 in the previous session, and it was up against the euro at $1.1214.

fell 0.73% to $39.41 a barrel, while slipped 0.58% to $41.44 per barrel, weighed by concerns about oversupply after Libya cited progress in resuming oil exports. [O/R]

Graphic: Asian stock markets https://product.datastream.com/dscharting/gateway.aspx?guid=516bc8cb-b44e-4346-bce3-06590d8e396b&action=REFRESH





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Three Great Large Cap Growth ETFs To Pick Up On A Dip


Introduction

Growth and technology stocks have continued to outperform this year. The tech giants like Amazon (AMZN), Apple (AAPL), and Microsoft (MSFT) continue to do well despite a global pandemic. Perhaps technology stocks are more adept to fast-changing environments. It also appears that technology companies can be more robust in difficult economic environments, as the value they provide customers remains high. If you’re looking for exposure to these large-cap growth and technology companies, but want to do it in a more cost-efficient or simple manner than individually picking out your favorite stocks, then the following three exchange-traded funds may be strong choices for any portfolio, especially on a pullback from current prices near all-time highs.

VUG: Vanguard Growth ETF

Let’s start with what is probably the least aggressive and most basic option I will write about today. The Vanguard Growth ETF (VUG) boasts an expense ratio of just 0.04% and has consistently beat the S&P 500 over the last decade by a very substantial margin.

Data by YCharts

The ETF is passively managed and aims to track the CRSP US Large Cap Growth index. This index (and thus VUG) selects US large-cap growth stocks based on the following six factors:

  • Expected long-term EPS growth
  • Expected short-term EPS growth
  • 3-year historical EPS growth
  • 3-year historical sales growth
  • Return on assets ratio
  • Current investment-to-assets ratio

VUG currently holds the large-cap growth companies one would probably expect. All the big technology names make up the top few holdings, while more classic companies like Home Depot (HD) and Visa (V) make the top 10. Other notable holdings that don’t quite make up the top 10 holdings include Costco (COST), McDonald’s (MCD), Comcast (CMCSA), Adobe (ADBE), and others.

Source: ETF.com VUG Overview

Overall, VUG is a well-rounded, low-expense growth ETF. This ETF will give investors exposure to the largest and most dominant growth companies that have consistently outperformed the market for decades, although investors are unlikely to gain exposure to the biggest winners that go from small caps to large caps in an ETF like this. If you’re just looking for a basic growth ETF without paying large fees, then I think VUG is an excellent consideration.

IXN: iShares Global Tech ETF

I believe the iShares Global Tech ETF (IXN) is another solid growth option for many investors to pick up on a dip from current levels, as this ETF provides more international/global exposure. Something that North American-based investors tend to ignore (or at-least they do in my experience). This ETF tracks the S&P Global 1200 Information Technology Sector and has even provided investors with some outperformance over the tracked index. Once again, this growth ETF has smashed the S&P 500’s returns in the past. This doesn’t mean it will continue to do so going forward, but technology isn’t going anywhere soon and large opportunities for growth remain. Investors should be aware of the fund’s 0.46% expense ratio.

ChartData by YCharts

The U.S. still makes up a majority of IXN’s holdings although investors will gain reasonable exposure to Japan, South Korea, and Taiwan, as well as a few European and Canadian names.

Source: iShares

Microsoft and Apple once again top the list of this ETF’s top holdings. Notably, however, are the international holdings absent from many US only growth ETFs. Samsung (OTC:SSNLF) makes up 2.49% of the ETF, while Taiwan Semiconductor Manufacturing (TSM) comes in 10th place with 2.3% of the fund.

Source: iShares

Some of the other international holdings worth pointing out include Japanese names like Keyence (OTCPK:KYCCF), Murata (OTCPK:MRAAF), and Tokyo Electron (OTCPK:TOELY), while ASML Holding (NASDAQ:ASML) and SAP (SAP) are notable European stocks.

Source: iShares

IXN provides investors with some international exposure in developed markets like Japan and Europe, as well as some companies from emerging markets like Taiwan. This makes this ETF unique to other growth ETFs that investors often consider building a position in.

SKYY: First Trust Cloud Computing ETF

It wasn’t too long ago that I wrote an article titled SKYY: Growth To Continue For Years on the First Trust Cloud Computing ETF (SKYY). This ETF invests in cloud computing companies and is the most aggressive ETF I will mention in this article. SKYY has an expense ratio of 0.60% and tracks the ISE CTA Cloud Computing Index.

The ETF was rocked, much like everything else, in February and March but has since recovered fully and even moved higher. As of the time of writing, SKYY sits up 20% year-to-date.

ChartData by YCharts

Cloud computing is projected to grow to over $350 billion by 2022, up substantially from a projected $266 billion in 2020. The COVID-19 pandemic even may accelerate this growth as people connect through the internet and cloud-based technology.

Source: Gartner (November 2019 Public Cloud Revenue Forecast)

While there are other cloud-focused ETFs like CLOU and WCLD, SKYY tends to own some of the larger cap names like Microsoft, Amazon, Alphabet (GOOG), and Alibaba (BABA) more heavily. These are the leading companies in the cloud space that have more than ample resources to defend their strong market positions and continue to take advantage of growth opportunities, making myself personally a fan of SKYY over some other options.

Source: Seeking Alpha

Conclusion

Technology is here to stay. Growth in various spaces across technology provides investors with opportunities over the coming years, yet it can be time-consuming and costly to be constantly re-adjusting individual stocks in one’s portfolio. Thus VUG, IXN, and SKYY are all superb large-cap growth ETFs with varying degrees of aggressiveness, international exposure, and risk that investors may do very well with picking up on a dip from current prices.

I’ll be writing more articles on great (or sometimes not so great) stocks. If you enjoyed this article and wish to receive updates on my latest research, click “Follow” next to my name at the top of this article.

Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long AAPL via options spreads and may take a long or short position in any other stock mentioned in this article. I have no position in the ETFs mentioned and no plan to initiate any position in the ETFs mentioned.





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Style-Box Update, Top 10 S&P 500 Mkt Cap Weights And Staying Positive


Normally, the “Style Box Update” is done mid-quarter and then the last day of the quarter, but Tuesday might be busy.

Growth is still hammering Value, and by a wide, wide, margin. No doubt Energy and now the Financial sector have dragged the “value” style through the gutter. Clients over overweight Financials, but haven’t owned any Energy since 2017.

Across every market cap, Growth is outperforming Value by at least 1,000 bps YTD in 2020, in both a “good” market (positive S&P 500 return) and a “bad” market.

Small and Value really haven’t generated alpha since 2016.

Does this mean it’s time to reallocate? Consider this blog post when thinking about relative performance.

Updating the “Top 10” Stocks in the S&P 500 this weekend is harder than it looks. Exxon (NYSE:XOM) and Bank of America (NYSE:BAC) have now fallen out of the “Top 10” market cap weights in the S&P 500.

What is being shown in this table is the Top 10 S&P 500 weights (Procter & Gamble (NYSE:PG) is now #10 and not shown) and their current “estimated” 2020 EPS growth as of this weekend. (EPS Estimate source: IBES by Refinitiv.)

The “average” EPS growth for full-year 2020 is still 6%. While Amazon (NASDAQ:AMZN) is considered Consumer Discretionary, the top 4 names in the S&P 500 this weekend are Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Amazon and Facebook (NASDAQ:FB).

  • Top 3 names comprise 14% of the S&P 500 by market cap.
  • Top 5 names comprise 17.5% of the S&P 500 by market cap.
  • Top 10 names comprise 26% of the S%P 500 by market cap (versus 23.6% as of 2/15/20).

The second part of the table above is the top 9 Financial names in the S&P 500, only two of which remain in the Top 10, and those are Berkshire (NYSE:BRK.A) (NYSE:BRK.B) and JPMorgan (NYSE:JPM). Financials as a % of the S&P 500 have fallen from 15% of the S&P 500 to just 11% as of this weekend.

The “average” expected earnings growth for the top 9 names in the Financial sector is -2%, per the above table. CME is expecting the best EPS growth in 2020, probably thanks to the surge in volume in March ’20.

Clients are overweight Financials in their accounts in a nod to “Value” investing, and those positions are JPMorgan, Charles Schwab (NYSE:SCHW) and Chicago Merc (NASDAQ:CME).

This post Friday night highlighted the drop in the Financial weighting within the S&P 500.

——–

Great article by CNBC’s Michael Santoli in the 20% YTD drop in the standard 60%/40% asset allocation portfolio, and what it potentially portends for the US stock market. Michael Batnick at Ritholtz Wealth does great research work.

——–

Lots of folks calling the S&P 500 bottom:

  • Paul Tudor Jones
  • Leon Cooperman
  • Larry Fink

Gary Morrow, our favorite technician thought the December ’18 low at 2,350 and the lows early last week would hold.

Ryan Detrick wonders if there aren’t too many rushing in here trying to call the bottom.

The only thing I’ve told clients is to wait for the retest and then we’ll see.

——-

Still fascinated by the notion that a 20% S&P 500 correction is a bear market. Who anointed this number? Did it get traction because it allows mainstream and financial media to raise the decibel level on market noise? If I sold all my taxable accounts out and went to 100% cash in a market that corrected 20% and then ended the year (even just) somewhat better than that, and hit clients with a capital gains tax bill, there would be no assets at all to manage.

——-

Many thanks to Josh Brown at Ritholtz Wealth for trying to stay positive throughout this ordeal. Josh has steadfastly tried to be balanced about the news flow and market impact for several weeks now on CNBC, despite the fact the mainstream financial media lives for the drama. I worry that this is going to get politicized shortly and it’s started in Illinois as Governor Pritzker has started blaming President Trump. Even as the virus data will eventually improve with testing and the communication to the general public about the virus, the Presidential election will drive this whole thing right into the gutter.

——-

Two major sector potholes that have been avoided for clients the last few years are Energy and Retail. No Energy has been owned at all, although some smaller long positions have been taken in retail over the last 5-8 years, like a J.C. Penney (NYSE:JCP), when Marvin Ellison was CEO, Bed Bath (NASDAQ:BBBY) when it was trading at 1x cash flow, and Under Armour (NYSE:UAA) which was probably clients’ largest position and held the longest. UAA had to be sold when it disclosed the Justice Department investigation at the same time it disclosed the SEC accounting investigation (and the SEC investigation should have been disclosed much earlier). The Justice Dept. is a criminal matter and that’s an automatic sell. Clients lost money on JCP and BBBY, but it was a mixed P/L on UAA. The new CEO at Bed Bath is likely guilty of bad timing only: what a horrid time to try to turnaround a retail business. I’m surprised they don’t go private.

Thanks for reading. Remember this is all just one opinion, and I always try to update for readers, but don’t always get around to it.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.





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