Commentary on Today's Sell Off

After a big reversal from yesterday’s down opening, stocks recovered quite nicely to close modestly lower.  

"Stocks ended sharply lower today, as losses accelerated into the close and put both the Dow and the S&P 500 into the red for the year, and the Nasdaq into correction territory.

Upbeat results from Boeing Co. were credited with briefly pushing the Dow higher in early morning trading, before investors took an increasingly defensive stance, fleeing for the relative safety of utilities and consumer non-durable shares."1 

After the market closed today, Tesla and Microsoft announced earnings that dramatically beat estimates and have sent both stocks up nicely in aftermarket trading. 

How are major benchmarks faring?

The equity markets sold off rapidly as they breached technical support levels in the last two hours of trading, which triggered electronic trading, exacerbating the market sell off.  

"The Dow Jones Industrial Average DJIA, fell 606.11 points, or 2.4%, to 24,583.42, while The S&P 500 SPX, dropped 84.59 points, or 3.1%, to 2,656.10, its sixth straight losing session. Meanwhile, the Nasdaq Composite Index COMP, shed 329.14 points, or 4.4%, to 7108.4, a performance that put the index more than 10% below its Aug. 29 all-time high, meeting the widely used definition of a market correction. The loss also marked the worst day for the Nasdaq since Aug. 18, 2011."1

October is shaping up to be a brutal month for equities, with the S&P falling 8.9% month-to-date, the Dow down 7.1%, and the Nasdaq falling 11.7% since the start of the month. 

Wednesday’s session also sent the Dow into losing territory for the year, with the index down 0.6% in 2018. This is the fifth consecutive week of losses for the Dow, making this its longest string of weekly losses since July, 11 2008, when it fell for six straight weeks.

The S&P 500 also ended the trading day in the red, down 0.7% year-to-date."1

What drove the market? 

Historically September and October are volatile months.  With the midterm elections less than two weeks away, concerns about the Fed's position on interest rates, concerns over the slowing global economic expansion, the slowing in China (which many believe has been understated), concerns over Italy's budget proposal, Britain's efforts to exit the Eurozone, and fear about corporate earnings (and perhaps more importantly, earnings forecasts), investor sentiment weakened today. 

"Wall Street traders have been wading through this week’s deluge of quarterly corporate results, including several mega-cap names but have found few reasons to buy in an environment that promises higher interest rates and borrowing costs, as the Federal Reserve has indicated it will continue to tighten monetary policy by year’s end. On top of that, earnings growth shows signs of possibly stalling out due to tariff spats between the U.S. and China."1 Even though 90% of companies that have reported have met or surpassed their earnings, the market is forward looking and trade is an unsettled issue; both investors and markets dislike uncertainty.   

On the bright side, "the Fed’s Beige Book, a collection of anecdotes on the economy, showed that wages and prices are rising in the central bank’s 12 districts but not faster than a “modest to moderate” pace and that the economy expanded at a “modest to moderate” pace."1 The current economic data indicates the Fed should not be concerned about inflation. So the question is, “Why is the Fed continuing to tighten if there are no real signs of inflation?"  We believe the Fed is focused on tightening because the data indicates that in order for them to stimulate economic growth through monetary policy (i.e. cutting interest rates), they need to be able to cut the interested by 3% to 4%. The problem is that the Fed Funds rate is not yet at 3%." 

What are analysts saying?

"Alec Young, Managing Director of Global Markets Research, FTSE Russell laid blame for the day’s sell off on macroeconomic headwinds. “Chief among them is a Fed that seems determined to continue steady rate increases despite growing signs of weakening global growth as China struggles to stabilize its economy and markets all while US trade tariffs loom,” he wrote in a research note.1

“Meanwhile simmering US inflation makes it harder for the Fed to pause, making it more likely interest rates will continue to move up, potentially slowing growth next year. Lastly, Italy and the US elections both remain notable wild cards,” that are adding to investor unease, he argued."1

“We’ve had this massive shift in sentiment in recent months from ‘the market can do no wrong,’ to ‘the market can do no right,” said Amanda Agati, co-chief investment strategist at PNC Financial Services Group. She pointed to Tuesday’s steep selloff of Caterpillar CAT, -5.58%  stock as evidence that investors are more eager to sell on bad news than to buy on good news."

“It’s definitely becoming a stock picker’s market,” she said.“Companies that beat expectations and raise guidance get rewarded. Companies that miss or even report in line with expectations get pummeled.”

The triple overhang of trade uncertainty, Fed rate increases, and slowing global growth are “causing investors to jump on any bad news, or even just mediocre news, to punish stocks,” Lance James, senior portfolio manager at RBC Global Asset Management, told MarketWatch.1 

What do we think?

Our thoughts are that a day like today indicates the equity markets may be very close to being oversold.  The heavy technical selling in the final few hours today may have shown some capitulation from investors in index (passive invested funds) and less sophisticated investors.  Most analysts, if asked about their fear of a recession, would tell you they believe we should be o.k. for the next 18 to 24 months.  As we progress through earnings season, and continue to see positive economic data reported, we believe the market will again focus on fundamentals; in our view the current data does not warrant the selloff we have seen in the equity markets this week.

At times like these, it is very important not to fall prey to emotions, but  to stick to your long-term financial plan.  Please feel free to call or email us with any questions or concerns you may have or if you would like us to review your financial plan.



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