The feature this week was earnings reports from Microsoft (MSFT), Amazon (AMZN), Meta (META), Alphabet (GOOGL), and Apple (APPL); the first three out of the four were major disappointments and sent their shares to new 52-lows.

At this point, I think we can retire the FANG, FAAMG or whatever was the latest acronym for this cohort for a new one, MAMAA. Netflix (NFLX), one of the original members, was booted last summer when it lost 75% of its value between November of 2021 and June of 2022.

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Basically, these mega-caps, which had led the market for over a decade and had held up relatively well over the past 18 months, are finally ‘catching down’ to the broader market.

Actually, it’s more like a convergence. Cloud based software was where the weakness was for MSFT, GOOGL and AMZN, which have taken it on the chin this week. The generals are in retreat while the foot soldiers are advancing.

For example, energy, consumer staples, and recessionary plays have been moving higher. In fact, names like Exxon (XOM), Dollar General (DG) and McDonald’s (MCD) are at new 52-week highs.

If you compare the Invesco S&P 500 Equal Weight ETF (RSP) to the market cap weighted SPDR S&P 500 ETF Trust (SPY),you can see the former is down just 12% on the year, while the latter remains down 18% YTD.

Shining a light on how dramatic the rush into safe or supposedly ‘recession proof’ companies is the incredible differential in valuations. Sticking with a basic P/E multiple, it would be an understatement to say the consumer staple sector has become very richly valued.

I don’t think those valuations are sustainable; not from a growth standpoint and certainly not as bond proxies. With 1-5 yr rates all north of 4%, a dividend yield of 2.5%-3% is no longer as attractive as when interest rates were zero.

I’m still of the opinion that we are not quite in a recession as the labor market and consumer spending remains strong, as well as balance sheets continuing to be relatively robust.

I’ll be keeping my eye on these staples stocks, and through the iShares U.S. Consumer Goods ETF (IYK), looking for a bearish play.

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To Your Success,

Steve