Economically sensitive areas of the US stock market are flashing warnings over growth, even as major equity indexes edge higher.
The S&P 500 is up 8.6 per cent for the year after gaining 1.5 per cent in April, thanks to roaring year-to-date rallies in shares of Microsoft, Amazon and Google parent Alphabet and other growth and technology stocks that command heavy weightings in broader indexes.
Beneath the surface, however, areas of the market tied to economic sentiment such as transports, semiconductors and small-cap stocks dropped in April, while so-called defensive sectors are outperforming.
Investors cited growing caution among market participants faced with a thicket of concerns, from fears of a possible US default this summer to worries that the Federal Reserve’s aggressive monetary tightening could bring on a recession.
“People are starting to more defensively position themselves,” said Aaron Dunn, co-head of the value equity team at Eaton Vance.
“The overall signal to me is there is still a lot of fear about recession and oncoming weakness in the back half of the year.”
Areas of the market showing cracks include the Russell 2000, an index populated by smaller, domestically focused companies, which was down 1.9 per cent for the month.
The Dow Jones Transportation Average, another bellwether of economic health, fell 2.9 per cent.
A 7.3 per cent drop in the Philadelphia SE Semiconductor index was a worrying sign, as chips are ubiquitous in a wide range of products. The index is still up 18 per cent for the year.
Regional banks are also wobbling, with the KBW Regional Banking index down 3.5 per cent in April following a rout this week in shares of First Republic Bank.
At the same time, consumer staples and health care, sectors favoured by investors during uncertain times, have rallied in the past month.
Investors will focus on next week's Fed meeting, with the central bank expected to announce another 25 basis point rate hike on Wednesday.
A bevy of earnings are also on deck, including results from Apple on Thursday.
Though the S&P 500 has shown resilience, just seven stocks — Apple, Microsoft, Alphabet, Amazon, Tesla Meta Platforms and Nvidia — were responsible for more than 88 per cent of its year-to-date gain as of Thursday, according to Mike O'Rourke, chief market strategist at Jones Trading.
“It makes me nervous to be honest,” said James Ragan, director of wealth management research at D.A. Davidson.
“It just seems like the market gains are being concentrated in fewer and fewer stocks and that is probably unsustainable for too long.”
Mr Ragan is recommending clients overweight defensive sectors such as health care, staples and utilities.
While results from mega-caps and strong economic reports buoyed optimism among some on Wall Street, others focused on downbeat news from companies in economically sensitive areas.
Shares of United Parcel Service tumbled 10 per cent on Tuesday after the world's largest parcel delivery company pegged annual revenue at the lower end of its forecast and warned of persistent pressure on volumes.
The next day, shares of Old Dominion Freight Line also dropped 10 per cent after the trucking company missed quarterly estimates for profit and revenue.
"They are talking about demand being down and they are ridiculously important shipping companies,” said Matt Maley, chief market strategist at Miller Tabak.
Both stocks are part of the closely watched Dow Jones Transport Average, which was down 2.7 per cent on the week and off 10 per cent from its high for the year reached in February.
Mr Maley is recommending clients hold higher-than-typical cash levels because of concerns about a recession and because safer assets now have higher yields, while favouring energy and defence stocks.
Of course, not all signs have pointed to economic weakness in recent weeks.
Overall, earnings have come in better than feared for the first quarter. With just more than half of the S&P 500 having reported, earnings are on pace to have declined 1.9 per cent for the first quarter from the year earlier period, according to Refinitiv.
That is a smaller decline than the 5.1 per cent drop expected at the start of April.
Meanwhile, data on Thursday showed an acceleration in consumer spending in the first quarter as US gross domestic product increased at a 1.1 per cent annualised rate.
"It's hard to have a recession when consumers' incomes are rising, and they are spending more on both goods and services," Yardeni Research said in a note on Friday.
BMW M5 specs
Engine: 4.4-litre twin-turbo V-8 petrol enging with additional electric motor
Power: 727hp
Torque: 1,000Nm
Transmission: 8-speed auto
Fuel consumption: 10.6L/100km
On sale: Now
Price: From Dh650,000
How England have scored their set-piece goals in Russia
Three Penalties
v Panama, Group Stage (Harry Kane)
v Panama, Group Stage (Kane)
v Colombia, Last 16 (Kane)
Four Corners
v Tunisia, Group Stage (Kane, via John Stones header, from Ashley Young corner)
v Tunisia, Group Stage (Kane, via Harry Maguire header, from Kieran Trippier corner)
v Panama, Group Stage (Stones, header, from Trippier corner)
v Sweden, Quarter-Final (Maguire, header, from Young corner)
One Free-Kick
v Panama, Group Stage (Stones, via Jordan Henderson, Kane header, and Raheem Sterling, from Tripper free-kick)
COMPANY PROFILE
Name: Kumulus Water
Started: 2021
Founders: Iheb Triki and Mohamed Ali Abid
Based: Tunisia
Sector: Water technology
Number of staff: 22
Investment raised: $4 million
UAE currency: the story behind the money in your pockets
More coverage from the Future Forum
The specs
Engine: 4.0-litre flat-six
Torque: 450Nm at 6,100rpm
Transmission: 7-speed PDK auto or 6-speed manual
Fuel economy, combined: 13.8L/100km
On sale: Available to order now
ON%20TRACK
%3Cp%3EThe%20Dubai%20Metaverse%20Assembly%20will%20host%20three%20main%20tracks%3A%3C%2Fp%3E%0A%3Cp%3E%3Cstrong%3EEducate%3A%3C%2Fstrong%3E%20Consists%20of%20more%20than%2010%20in-depth%20sessions%20on%20the%20metaverse%3C%2Fp%3E%0A%3Cp%3E%3Cstrong%3EInspire%3A%3C%2Fstrong%3E%20Will%20showcase%20use%20cases%20of%20the%20metaverse%20in%20tourism%2C%20logistics%2C%20retail%2C%20education%20and%20health%20care%3C%2Fp%3E%0A%3Cp%3E%3Cstrong%3EContribute%3A%3C%2Fstrong%3E%20Workshops%20for%20metaverse%20foresight%20and%20use-case%20reviews%3C%2Fp%3E%0A
ALRAWABI%20SCHOOL%20FOR%20GIRLS
%3Cp%3ECreator%3A%20Tima%20Shomali%3C%2Fp%3E%0A%3Cp%3EStarring%3A%C2%A0Tara%20Abboud%2C%C2%A0Kira%20Yaghnam%2C%20Tara%20Atalla%3C%2Fp%3E%0A%3Cp%3ERating%3A%204%2F5%3C%2Fp%3E%0A
What the law says
Micro-retirement is not a recognised concept or employment status under Federal Decree Law No. 33 of 2021 on the Regulation of Labour Relations (as amended) (UAE Labour Law). As such, it reflects a voluntary work-life balance practice, rather than a recognised legal employment category, according to Dilini Loku, senior associate for law firm Gateley Middle East.
“Some companies may offer formal sabbatical policies or career break programmes; however, beyond such arrangements, there is no automatic right or statutory entitlement to extended breaks,” she explains.
“Any leave taken beyond statutory entitlements, such as annual leave, is typically regarded as unpaid leave in accordance with Article 33 of the UAE Labour Law. While employees may legally take unpaid leave, such requests are subject to the employer’s discretion and require approval.”
If an employee resigns to pursue micro-retirement, the employment contract is terminated, and the employer is under no legal obligation to rehire the employee in the future unless specific contractual agreements are in place (such as return-to-work arrangements), which are generally uncommon, Ms Loku adds.
How Tesla’s price correction has hit fund managers
Investing in disruptive technology can be a bumpy ride, as investors in Tesla were reminded on Friday, when its stock dropped 7.5 per cent in early trading to $575.
It recovered slightly but still ended the week 15 per cent lower and is down a third from its all-time high of $883 on January 26. The electric car maker’s market cap fell from $834 billion to about $567bn in that time, a drop of an astonishing $267bn, and a blow for those who bought Tesla stock late.
The collapse also hit fund managers that have gone big on Tesla, notably the UK-based Scottish Mortgage Investment Trust and Cathie Wood’s ARK Innovation ETF.
Tesla is the top holding in both funds, making up a hefty 10 per cent of total assets under management. Both funds have fallen by a quarter in the past month.
Matt Weller, global head of market research at GAIN Capital, recently warned that Tesla founder Elon Musk had “flown a bit too close to the sun”, after getting carried away by investing $1.5bn of the company’s money in Bitcoin.
He also predicted Tesla’s sales could struggle as traditional auto manufacturers ramp up electric car production, destroying its first mover advantage.
AJ Bell’s Russ Mould warns that many investors buy tech stocks when earnings forecasts are rising, almost regardless of valuation. “When it works, it really works. But when it goes wrong, elevated valuations leave little or no downside protection.”
A Tesla correction was probably baked in after last year’s astonishing share price surge, and many investors will see this as an opportunity to load up at a reduced price.
Dramatic swings are to be expected when investing in disruptive technology, as Ms Wood at ARK makes clear.
Every week, she sends subscribers a commentary listing “stocks in our strategies that have appreciated or dropped more than 15 per cent in a day” during the week.
Her latest commentary, issued on Friday, showed seven stocks displaying extreme volatility, led by ExOne, a leader in binder jetting 3D printing technology. It jumped 24 per cent, boosted by news that fellow 3D printing specialist Stratasys had beaten fourth-quarter revenues and earnings expectations, seen as good news for the sector.
By contrast, computational drug and material discovery company Schrödinger fell 27 per cent after quarterly and full-year results showed its core software sales and drug development pipeline slowing.
Despite that setback, Ms Wood remains positive, arguing that its “medicinal chemistry platform offers a powerful and unique view into chemical space”.
In her weekly video view, she remains bullish, stating that: “We are on the right side of change, and disruptive innovation is going to deliver exponential growth trajectories for many of our companies, in fact, most of them.”
Ms Wood remains committed to Tesla as she expects global electric car sales to compound at an average annual rate of 82 per cent for the next five years.
She said these are so “enormous that some people find them unbelievable”, and argues that this scepticism, especially among institutional investors, “festers” and creates a great opportunity for ARK.
Only you can decide whether you are a believer or a festering sceptic. If it’s the former, then buckle up.
WWE Super ShowDown results
Seth Rollins beat Baron Corbin to retain his WWE Universal title
Finn Balor defeated Andrade to stay WWE Intercontinental Championship
Shane McMahon defeated Roman Reigns
Lars Sullivan won by disqualification against Lucha House Party
Randy Orton beats Triple H
Braun Strowman beats Bobby Lashley
Kofi Kingston wins against Dolph Zigggler to retain the WWE World Heavyweight Championship
Mansoor Al Shehail won the 50-man Battle Royal
The Undertaker beat Goldberg
The National's picks
4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
9.30pm: Forever Young
