A bad week for Facebook shareholders

Stocktake: Facebook stock down $60bn over Cambridge Analytica’s revelations

Last week was a deeply unpleasant one for Facebook shareholders, with the stock losing over $60 billion (€48.65 billion) in market value following its worst two-day sell-off in over five years. Revelations regarding Cambridge Analytica's use of Facebook users' data during the 2016 US election scandal has clearly shaken investors, but Facebook still has two important factors – trend and valuation – in its favour. Facebook has trounced the wider market in recent years and last week's correction represents a mere dent in that outperformance.

The stock dipped below its 200-day moving average last week, something it has done on a handful of occasions over the past three years, with each of those dips proving to be buying opportunities. Of course, the corollary is the stock, still valued at almost $500 billion, could yet fall a lot further. Still, Facebook now trades on 18 times estimated earnings, its lowest ever as a public company and only slightly higher than the S&P 500. Accordingly, bullish voices like iconic investor and Facebook shareholder Bill Miller believe further damage will not be severe. The stock is "too cheap", Miller said last week. "This too shall pass."

‘Peak negativity’

Still, Facebook's valuation may be of limited support if the newsflow worsens in the coming weeks or months. Is that likely? Or will Facebook users and investors quickly move on? Last week will likely represent "peak negativity" for the shares, says Barclays, which notes what happened in previous cases where companies were hit by negative news, such as the Volkswagen emissions scandal of 2015. Often, investors quickly move on: shares stabilise within a fortnight of an initial sharp price decline before then recovering.

Obviously, that's not always the case – BP shares fell for three months after its 2010 oil spill and have yet to fully recover. Facebook's fate, says Barclays, depends on whether it is a "must-have utility" or whether users go elsewhere and realise they can live without the service. Stocktake tends to agree with market strategist Ed Yardeni and Ritholtz Wealth Management's Ben Carlson, both of whom suggest users won't drop their Facebook habit. Perhaps the biggest risk for shareholders isn't that users will desert it en masse but that regulators decide technology behemoths like Facebook have become too dominant. One way of addressing that would be to dismantle the social media giant and split Facebook, Instagram and WhatsApp into separate companies, thus hindering the micro-targeting of ads for which Facebook is famous. For now, that's all speculation, but "the bottom line is that these headlines matter", says Macquarie Research. "The political/regulatory/legal risks are rising."


Mixed messages in Merrill fund manager survey

Donald Trump

likes to think he is God’s gift to the stock market, but the latest Merrill Lynch monthly fund managers suggest otherwise, with the threat of trade wars and protectionism now the greatest source of concern to global investors. The latest survey shows the excesses of January, when bullish sentiment hit extreme levels, have been worked off. Still, trade wars aside, there’s not a lot of fear around at present. Cash levels are neutral. Equity exposure has dipped but remains above historical norms.

Nor has the recent weakness in European stock markets dented sentiment: although fund managers remain iffy towards the US, they remain significantly overweight Europe. Merrill's survey is best viewed in a contrarian light, so that's bad news for European investors. Fund managers have preferred Europe over the US over the past eight months, notes sentiment expert and Fat Pitch blogger Urban Carmel, during which time American equities have comfortably outperformed Europe's. The latest data suggests that trend will persist. Contrarians who really like to go against the grain, meanwhile, may be tempted by the UK, where continued agonising over Brexit has resulted in pessimism towards British stocks hitting all-time highs.

Night time is the right time for stocks

All of the action in US stock markets happens when most investors are asleep. Over the past 25 years, all of the market gains have come in after-hours trading, according to Bespoke Investment. If you’d bought the S&P 500 at the closing bell on every trading day and sold it at the next day’s open, you’d have bagged gains of 569 per cent. Incredibly, if you’d bought at the market open every day and sold at the market close, you’d actually have lost money. Academics have investigated this peculiar phenomenon, without ever settling on a definitive reason as to why it occurs.

One possibility, researchers have suggested, is that traders are unnerved by the lack of liquidity in overnight trading; by closing their position during the day, they feel more in control of their money overnight, artificially dampening prices. Unfortunately for them, that’s a costly illusion. Meanwhile, there’s an obvious lesson in the data for ordinary investors; ignore the news, ignore the market ups and downs, and sit tight.