For Sale: Performance Stocks, Slightly Worn

In the shadow of a strong January and continued earnings strength, investors are seemingly shoring up defensive assets for leaner times ahead, at least based on data from TD Ameritrade’s monthly Investor Movement Index. Are these sales and purchases a temporary phenomenon, or a portent of things to come?

The January edition of the survey, which tracks trading activity among TD Ameritrade clients, shows investors unloading typical performance names in favor of more steady value stocks.

Despite sustaining heavy losses that put it at a two-year low prior to its most recent earnings report, Facebook, inc. FB was net sold in the month.

Continued strong M&A activity didn’t keep the volatile biotech industry from going up for sale, with Gilead Sciences, Inc. GILD being sold nearly 14 percent below its most recent high.

Raytheon Company RTN was met with a similar fate, selling at a minimum 18 percent coupon even though fellow contractor United Technologies Corporation UTX reported strong earnings results and solid 2019 guidance.

Obviously, there were mitigating circumstances in all of these cases. Facebook’s troubles are well documented, and many investors may have taken the most recent privacy controversies as a key moment to lighten their holdings. As for Gilead and Raytheon, they were both higher on the month due to rising sentiment in their respective industries.

Why Choose Value When Everything’s On Sale?

In contrast to the stocks investors were unloading over January, those they added to their portfolios are many that have gone long neglected by most of Wall Street.

Ford Motor Company F, General Electric Company GE and AT&T Inc. T, each of which was near multi-year lows, were among the most popular portfolio additions in the month. Alongside them were other slow-growth defensive names like consumer staples stock Altria Group Inc. MO and the heavily diversified Berkshire Hathaway Inc. (NYSE: BRK-B).

While the list of net buys aren’t entirely safety stocks, Apple Inc. AAPL and Amazon.com, Inc. AMZN make appearances as well, they were both carrying discounts of anywhere from 10-35 percent during the month.

In fact, the only net bought stock in the survey that was neither a defensive stock nor in correction territory through most of the month was Microsoft Inc. MSFT.

Volatility Down, Earnings Up, Head On A Swivel

So what does all this mean in the context of January’s raw market numbers? The S&P 500 chart for the month might speak to the sheer strength of buying during January, but here are some facts to provide a little context for its unique characteristics:

• The S&P 500 gained 9.5 percent over the course of the month, its strongest monthly performance since October 2011 and its best January since 1987
• Volatility, which according to the VIX reached a three-year high in December, fell by nearly 30 percent in the month, settling back to its pre-October level
• Fourth quarter earnings showed 66.7 percent of companies who reported by the start of February beat bottom-line estimates, while 62.8 percent beat on revenue expectations

While that last point might seem less staggering than the first two, it’s arguably the most important trend of the month. That’s because throughout both 2017 and 2018, at least 70 percent of S&P 500 companies uniformly beat their quarterly estimates by at least 70 percent. That trend seemingly peaked in Q3, which saw 80 percent of the S&P 500 surpass EPS expectations while 77 percent beat on their top-line results.

Again, it’s important to consider the mitigating circumstances that might have contributed to the steep drop in earnings performance. For one, the financial and accounting benefits of the 2017 tax cuts have mostly worked their way through the market. Companies have largely exhausted their minimal plans for capital investment, instead of using the funny money primarily on a record amount of buyback programs.

Then there’s the ongoing U.S.-China trade war, which ramped up to its current pitch mid-way through 2018. While the effects on domestic industries were largely isolated through 2018, the impact of strained relations between the world’s two largest economies could now finally be acting as a drag on the balance sheets of corporate America at large.

Traders will have to wait and see whether these issues will prove to be harbingers of a true bear market. However, based on the data, it seems as though many investors aren’t taking chances.