Published December 21, 2018
As we go to press this week, a full 1/3 of the Dow Jones Industrial Average 30 stocks are in a bear market – typically defined as a decline of -20% or more. We note the breadth of this bear market list of stocks – from the very recent market darlings Nike (NKE), Home Depot (HD), and Apple (AAPL) to insurance and finance (Travelers: TRV and Goldman Sachs: GS), energy and industrials (Exxon: XOM and United Technologies: UTX), materials and information services (3M: MMM and IBM). It is a wide path of destruction now.
On the left side of the chart, we have the outperformers – Procter & Gamble (PG), Coca-Cola (KO), McDonalds (MCD). These are viewed as relatively non-cyclical companies with products and demand that largely defies economic ups and downs. They are defensive companies, in other words. Johnson & Johnson (JNJ) was on that outperformer list until a few short days ago. The new high JNJ hit on December 13th has become a -13% monthly decline as the company struggles with a new report lending perhaps further credence to lawsuits over its baby powder product (note: the lawsuits have been going on for years). Exxon (XOM) and Chevron (CVX) are now yielding, on average, almost 4% from their dividend.
In short, the abrupt change in market tone and subsequent bloodletting has been brutal for passive long-only investors. The small-cap Russell 2000 (IWM) has posted a win-loss record in this month of 1 win and 11 losses! It has only found positive territory ONE day out of 12 so far this month. And December is known to be a historically happy month for stock markets. No Christmas cheer so far this year. All of this is occurring as the economy marches forward and corporate earnings post record gains. However, stock investors are obviously NOT buying that the good times will remain. A trifecta of trade war concerns, a reduction in liquidity as the Fed returns rates (and their balance sheet) to normal, along with geopolitical and economic uncertainty in Europe have combined to give investors a massive headache.
Meanwhile, our TimingCube Turbo Model is +10% since early October, when the model detected a change in the market. Turbo is +33% so far in 2018. For that, we are thankful.
Was this the week the bulls threw in the towel? Five straight days of failed rallies and intense selling left the bulls gasping with indexes at their lowest levels since the summer of 2017. Uncertainty ruled the day in Monday’s trade with previously immune sectors like utilities and real estate facing serious selling pressure. A weak reading in the Empire Manufacturing Survey combined with a surprise legal ruling against the Affordable Care Act to add to the recent feeling of angst. A -2.1% decline in the S&P 500 was the result. A -7% plunge in oil prices was the most notable economic datapoint Tuesday. Stocks pushed higher by +1% before falling back to a flat finish on the day. Wednesday brought the Federal Reserve announcement of another 0.25% hike in short-term interest rates. While that move was widely expected, market participants seemed unnerved by Chairman Powell’s press conference statements, which investors heard as being less accomodative than they hoped for. A +1.5% rally in stocks evaporated to a -1.5% decline on the day. The 10-year U.S. Treasury bond, yielding 3.25% only a few weeks ago, tumbled to 2.78% as investors continued to seek safety. Earnings outlook concerns from FedEx (FDX) and Walgreens Boots Alliance (WBA) further fed into the narrative of a sharply slowing economy. Another hugely volatile day of trading Thursday with stocks down as much as -2.6% before recovering to -0.8% and closing at -1.6%. Oil prices slid another -5% continuing to fan the fires of global economic slowdown concerns. Friday delivered another intraday gain with stocks higher by +1.5% before the bears woke up to tear the rally effort down. Disagreements in Washington over how to resolve a budget stalemate and threatened shutdown added yet another negative to investors besieged by negative headlines. Stocks slid in the afternoon to a -2.1% loss and a dismal weekly close.
A terrible week for stocks as one rally effort after another failed. The S&P 500 (SPY) fell -7.05% while the Nasdaq 100 (QQQ) gave up -8.39%. The Russell 2000 (IWM) small-cap index also slid -8.40%, now having given back almost the entire post-election gain from two years ago.
Warm wishes and until next week.