Last week’s Thanksgiving Holiday shortened trading week was nothing short of a disaster for bulls across several asset classes including equities, and energy markets.
US equity markets have continued to be sold – across nearly all verticals – due in large part to investor fear that the end of our long-running economic cycle is around the corner. That fear is not borne out in the data yet, though there are signs that leading indicators are coming off recent highs.
The Housing Market Index released last week is a case in point. For November, the reading came in at 60 – down from October’s 68. October housing Starts were slightly less robust than Econoday consensus, coming in at 1,228M versus 1,240M. Durable Goods orders for October contracted (-4.4%). September’s reading was a revised -0.1%. Leading Indicators for October (0.1%) were also marginally weaker than the previous month (0.6%). Though there are signs of moderation in the rate of economic expansion evident in our most recent economic releases, that moderation does not justify the wholesale selling that has materialized over the past two months.
Other factors are contributing to the efficient reset lower that has come to define trading since the first week of October. A primary concern for investors is interest rates. Given that we see a degree of slackening in the most recent economic data, investors are concerned that a continued and uninterrupted tightening of monetary policy by the FOMC could potentially trigger a significant slow down in economic expansion. That concern is being priced into equity markets. This week we hear directly from Federal Reserve Chairman Jerome Powell. Importantly, we also receive the FOMC minutes from the last meeting. I would argue that those FOMC Minutes are arguably the most crucial data release this week. Any indication that the FOMC was considering a pause in tightening could potentially trigger a relief rally for equities.
Two other potentially significant data releases are scheduled for this week. On Wednesday we receive Q3 GDP data (c. 3.5%). We also receive International Trade in Goods data for October. Given the importance of President Trump’s trade and tariff policies, this data will be very closely combed through. Thus far, President Trump’s trade policies have seemingly had little impact on our massive trade imbalances – particularly with China.
Three of the largest sectors of the S&P 500, financials, energy, and tech have all found themselves under tremendous pressure for nearly two months and all for varied reasons. That said, when three of the largest constituents verticals in the S&P 500 fall into correction, it is nearly impossible for the broader market to remain buoyant.
Financials are a proxy for where investors believe the economy will be 2 -3 quarters down the road. If recent price action in the sector is any indication, investors are pricing in an economic slowdown in 2019 – possibly 2020.
The energy sector is taking a head-on hit as a result of WTI crude oil’s collapse from $76.55/bbl. to $50.58/bbl in recent weeks. The fear being priced in is multifaceted. Investors are anticipating that crude’s meltdown is an indication that an economic slowdown is in the offing, and as a result, adding momentum to the sell-off. However, it is important to note that crude and shale oil production have jumped dramatically in recent quarters. The increased production is adding supply to the market. Additionally, 2019 is expected to reflect more of the same with shale oil production here in the US expected to reach record highs. Crude’s meltdown is not truly a reflection of slowing demand, though that may be a factor. Also contributing are rising production levels, rising rig counts, and seasonal consumption weakness.
Large-cap tech, as a sector, has its own particular problems. Those challenges include, but are not limited to, concern over user growth, US and EU regulatory overhang, privacy concerns, and the prospect of anti-trust legislation down the road. Given those headwinds, the sector has been crushed. A theme that best defines the sector has been the anacronym FAANG. The stocks that comprise the FAANG group and their recent relative performance are: Facebook (FB), which has lost 40% from its all-time high; Apple (APPL), which has lost 26.1%; Amazon (AMZN), which has lost -26.7%; Netflix (NFLX), which has lost -39%; and Alphabet (GOOG), which has lost -20%. The combined loss of market value for these stocks from their all-time highs, registered earlier this year, is in excess of $1 trillion. The underperformance posted by these stocks has weighed heavily on the broader market.
One more variable that I believe is fueling uncertainty across nearly all asset classes is Brexit. This weekend, The EU and UK signed a divorce agreement of sorts. It is the result of two years of negotiations. PM May will need parliamentary approval for the agreement to become actionable. It is not clear whether or not she will receive that approval. In the event she does not, Brexit could well become a volatility trigger for global markets – one that has not yet been fully priced into markets.
Potentially the most significant variable yet to be fully priced into global markets is the escalating trade war between the United States and China. There is little argument that China has extremely predatory trade practices, heavily protected markets, and a resultant trade surplus with the United States that is untenable. President Trump is the first U.S. President willing to address this relationship before it threatens to permanently undermine US global economic competitiveness. He is ready to have this fight. This fight may lead to additional volatility in both U.S. and global markets.
Flickr photo: guppycat
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