Market Digest – Week Ending 11/20
Last week, US stocks were down about 3.5% and the common media explanation was fear of a December rate hike. This week, US stocks were up about 3.5% and the common media explanation was increased clarity around a more likely December rate hike. Often, market moves are impossible to explain. In any case, the Fed signaled the rate hike will probably happen and firming inflation data supported it. Bonds were little changed, but the dollar gained about 1% vs. the Euro and closed the week at $1.06.
S&P 500: 2,088 (+3.3%)
FTSE All-World ex-US: (+2.9%)
US 10 Year Treasury Yield: 2.26% (-0.01%)
Gold: $1,077 (-0.6%)
USD/EUR: $1.064 (-1.1%)
• Tuesday – Consumer prices rose 0.2% in October, and 1.9% since last year. The number was slightly above expectations and supports a likely interest rate hike in December.
• Wednesday – Minutes released from October’s Fed meeting suggested a rate hike is likely in December but that future hikes will be gradual.
• Wednesday – The suspected architect of last week’s terror attacks in Paris was killed in a police raid.
• Thursday – Nike reported higher than expected earnings and announced a $12 billion share buyback program. Shares rose.
• Thursday – Square and Match issued high profile IPOs. Both were priced below recent estimates but each rose on the first day of trading.
• Friday – A terrorist attack by a suspected al Qaeda linked group on a hotel in Mali ended with 27 dead, including the 5 attackers.
• Friday – An E.coli outbreak at Chipotle Mexican Grill has spread to six states including California and New York. Shares fell 12%.
Square (the company that makes the little plastic thing attached to iPads to read your credit card) IPO’d this week and is currently valued at $4.1 billion. The IPO means the population of Unicorns (private start-up companies worth more than a billion dollars) dropped by one. Going public is the good kind of unicorn attrition – simply losing value is the bad kind. But the Square IPO was not a winner for everyone. Its last funding round as a private company valued it at $6 billion. This means some investors have a loss and some employees likely have options that are worthless.
Before the stock market correction in August, so-called “down rounds” were almost unheard of. But reality is starting to sink into the private equity market. Earlier this month Fidelity reduced the value of its holdings in Snapchat by 25%. Dropbox and Zenefits valuations were also cut. Several prominent venture capitalists have commented that many unicorns are likely overvalued and some have voiced a belief that up to a third of them could be worthless.
It is hard to say if any of the private market issues impact the broader public markets. A few more high profile devaluations (Uber would be the most impactful) could shake confidence in the tech sector in general. But unlike 1999, when many public companies with huge valuations were still in start-up mode, today the sector is dominated by established companies with billions of dollars in revenues. There has been an interesting dichotomy.
Many of the smaller internet and trendy consumer companies have already seen big share declines in 2015. GoPro and Twitter are now below their IPO prices. Meanwhile, Apple is worth $665 billion (nothing new), Google $527 billion, Microsoft $432 billion, Amazon $313 billion and Facebook $303 billion (these are a lot higher than a year ago). These are fine stocks to own, but we’re starting to see more investor portfolios with huge Tech overweights and we would urge caution around that.