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Market Recap – Low Earnings From Growth Stocks Highlight Market Sensitivity

Market Digest – Week Ending 2/5

A softer than expected jobs report helped spark a Friday sell-off which left stocks lower for the week. Technology and Energy shares led declines. The dollar fell against most currencies as expectations for the number of rate hikes this year. Primarily due to currency, international stocks held up better than domestic issues. Gold and Treasuries rose.

Weekly Returns:

S&P 500: 1,880 (-3.1%)
FTSE All-World ex-US: (-2.6%)
US 10 Year Treasury Yield: 1.84% (-0.08%)
Gold: $1,173 (+5.1%)
USD/EUR: $1.116 (+3.0%)

Major Events:

• Monday – J.P. Morgan Chase agreed to buy almost $1 billion of loans from Lending Club.
• Monday – The Commerce Department reported a 0.3% increase in income but flat month over month spending.
• Monday – Yahoo was reported to be planning cutting 1600 jobs and closing several business units.
• Tuesday – Chipotle reported a 44% profit decline as a result of the E. coli events.
• Thursday – LinkedIn reported a Q4 loss and issued disappointing sales guidance. Shares fell 43% in Friday trading.
• Thursday – Initial jobless claims were reported at 285,000, modestly above expectations.
• Friday – The Labor Department reported job growth slowed in January. The official unemployment rate dropped to 4.9%.

Our take:

LinkedIn shares were cut nearly in half after issuing disappointing guidance for 2016. The severe reaction highlights the lack of mercy markets are affording earnings misses, especially in growth stocks. It is an underappreciated fact that growth stocks have been outpacing value for most of the last six years. As a result, the valuation gap has grown. Growth stocks are more expensive compared to value than usual.

We recommend a balanced approach between growth and value. We urge caution if your portfolio has gradually become concentrated in growth stocks, especially the big winners from the last year. In general they are down more than the market so far this year. They may bounce back, but if this turns into a full-fledged bear market they still have the farthest to fall.

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