Monday has been among the worst days for stocks this year, and today was no exception, as Pfizer (PFE), American Express (AXP), Valero Energy (VLO), Fossil Group (FOSL) and Mylan (MYL) tumbled.
Bloomberg News The Dow Jones Industrial Average fell 1% to 16,245.87, while the S&P 500 dropped 1.1% to 1,845.04.While the Nasdaq Composite underperformed again, this time it wasn’t by much: It fell 1.2% to 4,079.75. Still, the Nasdaq has dropped 4.6% during the past three days, the largest three-day selloff since August 2011.
American Express dropped 2.9% to $86.60 to help lead the Dow lower, while Pfizer fell 3% to $31.20 after it said offered poptimistic results for one of its breast cancer drugs but not that it improves survival. (Barron’s, by the way, thinks the market overreacted.) Valero Energy declined 4.5% to $51.91, while Fossil Group dropped 4.4% to $109.28 and Mylan finished off 4.4% at $48.40, making them the biggest losers in the S&P 500.
With the Nasdaq underperforming once again, the focus remains on the poor performance of the market’s fastest growing stocks. Marketfield’s Michael Shaoul calls the selloff in growth names a “payback period:”
…the “free lunch” of higher returns and equivalent volatility enjoyed by high multiple technology investors in recent quarters looks to have ended. Going forwards we would expect to see technology returns spread more evenly between “new” and “legacy” issuers (the robust performance of the semiconductor sector should not be ignored), and for the former to exhibit greater historic volatility in both historic and implied terms. We would also expect to see some of the capital crowded in technology to seep into other pro-cyclical sectors, with financials, energy and materials the obvious destinations based on the recent performance of all three sectors.
Deutsche Bank’s David Bianco says stocks still offer value–as long as bond yields stay low-ish. He explains:
The EPS yield on the S&P 500 is 5.9% on trailing 12-month EPS. This compares to 10yr TIPS yield of 0.6% and represents an equity risk premium of 530bps, still much higher than the historic average of 340bps…
The offered equity risk premium is still attractive if 10yr real yields don't rise much above 1.5% over the next few years. Our intrinsic valuation mode assumes a long-term real interest rate of 2% and real cost of equity of 6%. Today's persistently low treasury yields and falling corporate borrowing rates suggest that the fair real return on S&P 500 ownership might be materially lower than the 6% historical average. If interest rates only rise slowly and moderately as growth accelerates then there is upside to our S&P price targets.
BofA Merrill Lynch’s Savita Subramanian and team recommend taking advantage of analysts, who have been reluctant to take a strong stand:
The average estimate dispersion for S&P 500 companies ticked down in 1Q to 7.0% from 7.3% last quarter, the lowest reading in the history of our data (since 1986) and well below the long-term average of 18%. This indicates that analysts are more clustered than ever around consensus in EPS estimates, which we believe suggests a reluctance to diverge from the pack…rather than a strong conviction in earnings. Our quant work suggests that focusing on out-of-consensus ideas may be more fruitful.
At this point, we’ll try anything.
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