Weekly market update
What a horrible start to October it has been and coming off of a stellar Q3. For the month, the Dow has fallen 4.54%, the S&P 500 has fallen 5.49%, the tech-heavy NASDAQ has given up 8%, but the biggest loser has been the Russell 2000 (small caps) down 9.82%.
The selloff began earlier this month on the heels of better economic data which sent yields on U.S. Treasuries soaring and that spooked investors as if someone had yelled fire in a crowded theater. But I don’t think it is the higher levels on yields but the speed of the increase that provided the most angst. What is surprising is that people are actually surprised by higher rates.
And then it wasn’t just the speed at which the rates rose, you have to throw in China and their slowing economy and falling currencies. Concerns over Central Banks continued the commitment to raising rates also played a part. Oil prices spiking and tax-loss selling could also be to blame. Something else is also looming around earnings season—concerns are growing around corporate guidance given higher rates and trade disputes. We already see China’s economy slowing to a screeching halt thanks to the tariffs and the devaluation of their currency is making their Yuan buy fewer goods priced in dollar terms.
If you are not confused, then you are not paying attention. Over the last two weeks, trying to figure this mess out was like learning to parallel park in a demolition derby.
Hey, but look, “there is a sale on Wall Street—Ripe for the pickings—good names are still good names—Remember when Belk’s has a sale—You RUN INTO THE STORE NOT OUT OF THE STORE!
And we have such a strong economy. The National Federation of Independent Business (NFIB) survey came in hot and in his comments, the President of the NFIB was to the point, almost giddy.
Many trends and support levels were violated, especially in technology and secondary indexes. Although the Dow is still in its uptrend, the S&P Mid-Cap and Russell 2000 have broken their uptrends.
No one should be surprised to see a market sell-off because most uptrends in sectors/stocks and market indexes were overly stretched to the upside recently, and now they need some kind of pause/pull-back. But, a rally must make new highs to avoid negative divergences.
Wednesday and Thursday’s selling had some characteristics of a climactic flush. All things considered, we’re likely in the ballpark (best guess within a few %) of tradeable low, particularly given the seasonal tailwind that begins to emerge by late-October.
Oh, and it wasn’t just here in the U.S. that stocks sold off. After being closed for the “Golden Week Holiday”, Chinese stocks took a beating playing catch-up—well—actually catch down to U.S. stocks after the previous week’s selloff.
We saw the biggest decline in Chinese currency reserves in 7 months, and Beijing’s announcement of another 100 basis point required reserve rate cut, a step explicitly meant to ease financial conditions and—tangentially—devalue the Yuan even if the Peoples Bank of China (PBOC) forcefully declared it was not engaging in devaluation, we noted that “the further the yuan drops the greater the offset to US import tariffs, and the more likely that the Trump administration will impose even greater sanctions in the future as it sees Chinese monetary policy as specifically targeted to undermine the impact of Trump’s trade war including manipulating its currency.
Global manufacturing activity grew in September at the slowest pace in 22 months. The Eurozone manufacturing activity fell to a 2-yr low, Italy & Germany: a 25-month low, China: a 17-month low and Japan: a 2-year low. But, here in the U.S.: a 4-month high. That global-synchronized growth story—that’s out the window at this point.
Earning season got started on Friday with a good report from JP Morgan and a mediocre report from Citibank. We’ll see if the other big banks reporting this week can possibly help the markets. There is little in the way of economic data to digest this week other than industrial production and retail sales. That’s okay, I think we will have our hands full with politics, the FED, rates and trade. So, strap in and hang on and we’ll keep you posted.
Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
October 15, 2018
