Another nervous Monday started another week on the downside. We'll see where the next few days take us, but for now, investors keep jumping at shadows from both China and Washington. Stay cool.
Take Technology stocks as your guide to the China story. Most of the biggest stocks we associate with the sector are only tangentially exposed to any kind of trade barrier rising across the Pacific Ocean. Amazon (AMZN: $1,693, down 5% yesterday) doesn't do a lot of business in China. That's really more the home turf for Alibaba (BABA: $150, flat).
Or take Alphabet (GOOG: $1,036, down 6%) and Twitter (TWTR: $34, down 6%), neither of which is active in China as both companies are effectively banned. Facebook (FB: $164, down 8%) is a similar story. China has its own Social Media hubs. Only expats and a few others use Facebook there.
Nonetheless, all of these stocks plunged at the open. You can't blame China. You can't even really blame Mexico, since none of these companies import "products" across the border. At first some people tried to talk up a few weekend glitches as a reason why Alphabet went on the defensive, but it wasn't convincing.
By the end of the day, the market finally got its story together. The House Judiciary Committee is going to investigate potential anti-competitive practices in Silicon Valley, handing oversight over Facebook and Amazon to the Federal Trade Commission and Alphabet to the Justice Department.
The U. S. Department of Justice will also take a look at Apple (AAPL: $173, down 1%). We suspect that all of these probes are overdone but there's no arguing with Congressional scrutiny when lawmakers think they're on the track of too much power concentrated in too few companies.
Apple in particular seems like a stretch. What have they done lately that was so wrong? We have people on our team who were even quoted in the courtroom exhibits when the government argued in the 1990s that Microsoft (MSFT: $120, down 3%) was keeping a then-struggling Apple alive solely to fend off monopoly charges. Since then, the company has come a long way back without dominating any of its core markets. Look at phones, computers, online payment systems or even streaming music, and Apple is far from the only game in town.
However, all five gigantic Technology stocks (which we call the FAAAM) sank. Yes, even Microsoft, which is arguably more vulnerable to a chill around China than any U.S. oversight this late in the competitive game.
In our view this is exaggerated and premature. Apple is the key. It's now facing a government probe into its business as well as higher trade barriers around its customers and production plants in China. Theoretically it had the worst day of any of the FAAAM, and yet its stock held up the best.
Investors were evidently impressed with the company's annual Worldwide Developers Conference, which unveiled new Services and a few refinements of the Apple product line. The combination of a looming trade war and Congressional scrutiny wasn't enough to completely overcome the buzz from a new operating system and some new Apple Watch tricks. In our view, the threat is overstated but the stock's relative strength yesterday demonstrates just how distracted Wall Street is right now. People are jumping at shadows and cheering their own sense of relief when the news isn't all awful. That, in our experience, is a good sign that a downturn is approaching its ultimate bottom.
And not all of yesterday's moves were to the downside, either. Most Technology stocks got caught in the FAAAM backlash but ultimately about two dozen of our recommendations gained ground yesterday. Real Estate, the High Yield Portfolio and our defensive Healthcare stocks edged up. Annaly (NLY: $9.05, up 3%) announced a $1.5 billion share buyback. New Residential's (NRZ: $15.48, up 2%) had some investors wake up and buy the 11.9% yield. In the meantime, we're looking for Salesforce.com (CRM: $145, down 4%) to report earnings tomorrow night.
The gains aren't huge, but they show that the market isn't simply acting on instinct. There's a degree of reason at work here . . . and that's enough to turn the mood around once the cool heads prevail. For now, stay calm and we'll be in touch if anything serious happens.