Uncategorized, Weekly Update

Explanations for the Market Drop

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Published October 19, 2018


Our post last week noted that the October selloff in stocks likely had drivers other than the oft-noted rise in interest rates as some of the most interest rate-sensitive sectors, such as utilities, were holding up just fine. We also noted that the wave of geopolitical issues that seem to be ever-widening were unlikely to be a major cause of the selloff as investors were not pouring money into bonds, as they typically do during periods of angst. A recent note from Oppenheimer points to persistent and increasing weakness in non-U.S. economies as being the primary catalyst for the current stock market correction. They offer the following chart group noting that European stocks rolled over first, followed by Chinese stocks, then more global economic-sensitive sectors like materials and semiconductors. The Russell 2000 small-cap index has relatively little international exposure. However, this index has been unduly hurt by that sharp jump in interest rates. Then, finally, the market leading FANG stocks (FANG = Facebook, Amazon, Netflix, Alphabet (Google), and often Apple. FANG+ is an index that also includes five other high-growth large-cap stocks, currently Nvidia, Alibaba, Baidu, Twitter, and Tesla.). See as they all go a-tumblin’

Stock rollover

Another angle to explore on the impact of international worries bleeding over into U.S. markets, is to look at bonds. We see below that emerging market bonds have dropped back this year as the U.S. dollar has recovered from last year’s decline. This currency move and the related bond move reflects the dramatic shift in market assumptions. Last year, markets were thrilled at the prospect of a rare synchronized global economic move upward. This assumption pushed money into international markets and non-U.S. currencies – mainly the Euro. This year, that script has been flipped, with the synchronized global growth story falling apart. As a result, the Euro has tumbled back to where it was before the synchronized global growth story took hold (e.g. back to January 2017 levels). International and emerging market bonds have suffered.

However, we also see below that investors are not fleeing risk across the board. High yield bonds have seen relatively little pullback thus far, meaning that investors are not all that concerned about the U.S. economy coming undone. If they were concerned about domestic economics, high yield bonds would be sold as money sought safer investment choices.


In short, what causes markets to move one way or another is a substantial mix of factors. News outlets and “headline” analysts are driven to simplify the story. But the reality is a complex stew of inputs and influences. As seen in our posting this week and last, markets are digesting a lot of shifting information. Our models are attempting to provide us directional trade guidance as the markets bounce to and fro. Our history is that our models will be right more than wrong and deliver good profits to our accounts as a result. Currently, risk is elevated, markets are unsettled, and we are seeing an increased number of model signals as a result.

Market Update

Stock investors looked for a rebound after one of the worst weeks of the year. Monday brought little solace, however, as stocks fell back -0.6% despite good earnings from Bank of America (BAC). Tuesday gave bulls their bounce with strong earnings in the finance sector from investment banks Goldman Sachs (GS) and Morgan Stanley (MS), in the healthcare sector from Johnson & Johnson (JNJ) and insurer UnitedHealth (UNH), and in the battered tech sector with a big earnings-driven performance from software makee Adobe Systems (ADBE). Stocks bounced back with a +2.2% gain. The Nasdaq gained near +3% to recover almost the entirety of its prior week slide. Unfortunately, there was no follow-through Wednesday despite a powerful earnings report from top tech/consumer company Netflix (NFLX). A disappointing housing report upended shares in that sector while IBM seriously disappointed investors, sending its stock slumping -8% despite maintaining its earnings guidance. Crude oil also struck a bearish tone, losing -3%. Still, despite the range of negatives, stocks held flat on the day. International markets struggled Thursday leading to a renewed bout of selling on Wall Street. The Nasdaq gave up Tuesday’s heady gains as investors returned to punishing stocks for almost any reason. Slowing growth in China, a poor export report out of Japan, and continued hand-wringing over the anti-European Union talk of Italy’s new government kept buyers away from stocks. The major U.S. indexes tumbled between -1.4% and -2.0% on the day. Stocks began Friday in good form rising +1% as Chinese officials sought to calm investor nerves in that country and an earnings beat from defensive consumer staple Proctor & Gamble (PG) brought money into the staples sector. Nevertheless, stocks could not hold the early advance, giving way to selling and a mixed result for the market overall.

Stock indexes sought support at their 200-day moving averages this week and generally found it, at least among the larger company indexes. However, a Tuesday rally effort was negated by week’s end leaving the S&P 500 (SPY) positive by only +0.11% for the week. The Nasdaq 100 (QQQ) lost -0.75%. Small-cap stocks (IWM) dipped -0.16%. The 10-year U.S. Treasury yield rose back to 3.2% during the week.

Warm wishes and until next week.