Published December 7, 2018
Stock investors were reminded this week that the market remains unhealthy. After approaching a retest of this market correction’s lows a couple of weeks ago, stocks ripped higher last week to recover all of the ground given up the week before. This week began well. Soothing words of a trade tariff truce gave investors confidence that perhaps the trade issues that have hung over stocks for much of the year would be resolved. This news, on top of recent market-friendly comments by Fed Chair Powell, appeared to set the stage for stocks to bust out of the fear and volatility that has gripped investors since October began. It wasn’t to be. Bond markets dealt a hard blow to the psyche of investors Tuesday when interest rates fell, pushing rates back down to levels seen early this year and bringing some portions of the yield curve out of balance.
When bonds are bought, prices rise, same as any other asset. Rising bond prices push interest rates lower. Thus, the falling interest rates meant that investors were buying bonds. If the market is confident in future economic growth, returns are expected to be better owning stocks over bonds. When investors become concerned about the future, they choose bonds over stocks, preferring to lock in a given return rather than risk money on the more speculative return in stocks. In Monday’s trade this week, stocks embraced talk of a trade tariff truce, only to become skeptical Tuesday when few details were offered by the Trump Administration. The rush into bonds further spooked stock investors, leading to selling en masse and a -3% plunge, putting any holiday rally hopes in jeopardy.
The chart below shows the break higher in 10-year U.S. Treasury bond prices as investors pour money into the safety of Treasury bonds. The sharp move higher in the first half of 2016 also coincided with a market correction amid concerns of a dramatic decline in oil prices and a highly contentious Presidential election cycle. Both conditions eased by year-end and bond prices came back down. Will the current fears bracing investors also be resolved favorably?
The bottom line is when investors are preferring bonds over stocks, they are concerned about economic growth. Those concerns have become front and center this week, adding another few bricks to the wall of worry facing stock investors. After initially appearing to be at odds with market direction, our recent Turbo SELL signal has found profits, bringing a little early holiday cheer to our portfolios.
Market Update
Stock investors suffered whiplash this week as market volatility kept investors on the edge of their seats (and frayed their nerves). Monday brought market cheer as the weekend G20 meeting produced some trade-friendly words from President Trump and Chinese Premier Xi Jinping. Stocks rode the good feelings to a +1.1% gain. But further examination of what the leaders actually agreed to was found lacking. The market registered its disappointment Tuesday in a brutal -3.2% shellacking with the Nasdaq down almost -4%. Adding to investor nerves was a notable flattening in a portion of the yield curve suggesting fears of an economic slowdown; 2, 3, and 5-year U.S. Treasury bonds all yielded the same 2.8% for a time Tuesday. Markets were closed Wednesday to honor the passing of President George H.W. Bush. Trade resumed Thursday in a wild session with stocks plunging -3% before reversing all the way back to a nearly flat finish. Pressure was applied at the outset with news of the arrest of an executive of one of China’s largest companies, Huawei. The arrest focuses on possible violations of restricted trade with Iran. However, the market’s concern was that the move would damage the fragile trade truce struck over the prior weekend between the U.S. and China. Offsetting this fear was a Wall Street Journal article suggesting the Federal Reserve might be leaning toward a pause in rate hikes after their December policy meeting. Stocks kicked off Friday with a slightly positive tilt before sellers gathered strength to push indexes downward throughout the day. Ongoing weakness in Apple (AAPL) and the market’s failure to embrace what seemed to be a generally market-friendly employment report kept bears in control. Stocks tumbled -2.3% on the day with yield on the 10-year U.S. Treasury bond falling to 2.85%, well below the 3.25% of only two short months ago.
Last week, it appeared the bulls might have found some footing, only to see the rug pulled out from under them this week as stocks returned to their low points for this market correction. Stocks gave up all of the prior week’s advance and then some in a -4.38% drubbing for the S&P 500 (SPY). The Nasdaq 100 (QQQ) suffered a -4.72% slide while small-cap stocks (IWM) set a new low in a -5.63% weekly gouging.
Warm wishes and until next week.