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Stocks Flat Despite Buyout Activity

Market Digest – Week Ending 2/21

Stocks were mostly flat this week despite Fed minutes showing some members favor raising short term rates later this year, as opposed to the second half of 2015 as was previously mentioned. Separately, two large acquisitions were announced, likely inspiring investors to believe current valuations can be supported. Bond prices were little changed.

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Weekly Returns:

S&P 500: 1,836 (-0.2%)
FTSE All-World ex-US: (+0.5%)
US 10 Year Treasury Yield: 2.73% (-0.01%)
Gold: $1,323 (+0.4%)
USD/EUR: $1.374 (+0.3%)

Major Events:   

  • Tuesday – Actavis agreed to buy Forest labs for $25 billion.
  • Tuesday – King Digital, maker of Candy Crush Saga, filed for an IPO, and is expected to look for an $8 to $10 billion valuation.
  • Tuesday – The Federal Reserve created new rules requiring large foreign banks with US operations to maintain higher capital than their own countries may require.
  • Wednesday – Minutes from the Fed meeting showed some members favor raising short term interest rates sooner than previously discussed.
  • Thursday – Facebook agreed to acquire WhatsApp for $19 billion.
  • Friday – Ukraine’s President and opposition leaders signed a deal aimed at ending Ukraine’s deadly political crisis by reducing the president’s powers, forming a new coalition government and holding early presidential elections.

Our Take:

Facebook’s $19 billion acquisition of WhatsApp raised a lot of eyebrows. The $355 million per employee price tag may be a record, but from a cost per user perspective it is not completely out of line with several other internet companies. Which raises the question – are we in dotcom bubble 2.0?

San Francisco sure feels a lot like 1999. In those days, unheard of valuations were justified by impressions. These days it is users – which is only slightly more reassuring. But there are some meaningful differences. The biggest players now (Google and Facebook) are huge companies with huge revenues. And the small players (meaning the $1-$3 billion range) are also real companies with real revenues. This time around you don’t get a billion dollar valuation just for putting a .com on the end of your name.

In 1999, the Technology sector hit a peak of 34% of the S&P 500 by weight. Today, it is close to 19%, but is once again clearly the largest sector. Tech performed well last year, but wasn’t radically different than the rest of the stock market. Maybe that makes this more like 1998 than 1999. It’s probably too soon to worry much about crazy valuations or another tech collapse. And if there is no euphoric rush into tech stocks in 2014 or 2015 there likely won’t be any kind of collapse. Either way, it will be interesting to watch.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk, CFP®
Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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