Please note: there will be no market commentary next week due to the Easter holiday. Thank you.
It was another rough week for the stock market as it turned in its worst week in over two years. Through Friday’s close, the Dow lost 5.7%, the S&P fell 6.0%, and the Nasdaq plunged 6.5%. Bonds prices rose modestly again as their yields were lower, though they saw some large swings this week. Gold moved higher, up 2.7%. Oil also rose, rising 5.6% to close at $65.74 per barrel. The international Brent oil rose $5 cents to $70.36.
It was another rough week for the stock market as it turned in its worst week in over two years. Through Friday’s close, the Dow lost 5.7%, the S&P fell 6.0%, and the Nasdaq plunged 6.5%. Bonds prices rose modestly again as their yields were lower, though they saw some large swings this week. Gold moved higher, up 2.7%. Oil also rose, rising 5.6% to close at $65.74 per barrel. The international Brent oil rose $5 cents to $70.36.
Looking at a chart with a longer time-frame, we can see the market is now lower for the year and trading back to December levels.
This week was interesting in that the sectors that had done well recently fared the worst while the underperformers saw some life. The tech and financial sectors had been pillars of this market, yet they were hit the hardest this week. These two sectors make up 40% of the S&P 500, so their decline had a significant impact on the market.
On the other hand, utility companies had been underperforming the market, only to fare the best this week – though it was still negative.
There were several stories driving the markets this week, but we’ll start with tech as negative headlines from this sector set the tone for the week.
On Monday, Facebook dominated headlines with the news of their mishandling of user data, resulting in its worst day in four years. Facebook is one of the largest tech names and is currently the second-most popular stock in the market (behind Amazon), so the news brought down the entire tech sector. As mentioned earlier, tech makes up a large percentage of the broader market, so it had an outsized effect on the market.
Below is a chart of the technology-related “FANG” stocks – Facebook, Amazon, Apple, Netflix, and Google. We can see how much this group has outperformed the broader market – until this week.
On the other hand, utility companies had been underperforming the market, only to fare the best this week – though it was still negative.
There were several stories driving the markets this week, but we’ll start with tech as negative headlines from this sector set the tone for the week.
On Monday, Facebook dominated headlines with the news of their mishandling of user data, resulting in its worst day in four years. Facebook is one of the largest tech names and is currently the second-most popular stock in the market (behind Amazon), so the news brought down the entire tech sector. As mentioned earlier, tech makes up a large percentage of the broader market, so it had an outsized effect on the market.
Below is a chart of the technology-related “FANG” stocks – Facebook, Amazon, Apple, Netflix, and Google. We can see how much this group has outperformed the broader market – until this week.
Worries over protectionism remain a concern for investors, too. This week, President Trump announced new tariffs on Chinese goods coming into our country as a response to their unfair trade practices.
Concerns grew further when Chinese officials responded by announcing new tariffs on U.S. goods shipped to China. Most investors agree that a response to unfair Chinese trade practices is needed, but there is always the worry over an escalating trade war.
While the risks of a trade war remain low at this time, investors are starting to move to investments that will be least impacted from a trade war. Small cap stocks, in particular, will hold up well since smaller companies typically don’t have exposure to foreign markets. This chart shows how smaller stocks have done compare to larger ones:
Concerns grew further when Chinese officials responded by announcing new tariffs on U.S. goods shipped to China. Most investors agree that a response to unfair Chinese trade practices is needed, but there is always the worry over an escalating trade war.
While the risks of a trade war remain low at this time, investors are starting to move to investments that will be least impacted from a trade war. Small cap stocks, in particular, will hold up well since smaller companies typically don’t have exposure to foreign markets. This chart shows how smaller stocks have done compare to larger ones:
Lastly, the Fed was in the news as they held one of their policy meetings. As expected, they announced a further pullback in their stimulus program by raising interest rates (low interest rates make it easier and cheaper to borrow money and have helped push stock prices higher).
However, investors were more interested in future policy actions by the Fed. The Fed still expects to raise rates two more times this year – as expected – but estimated three rate hikes next year as the economy improves. This is up from the two rate hikes originally projected. This slight difference was seen as a negative by investors and added pressure to the market.
We think these rising interest rates are key to the volatility in the markets. Low rates act like a pain killer for the market. As we saw the last several years during historically low interest rates, the market shrugged off any bad news and steadily moved higher with little volatility. Now rates are rising and the pain killer is coming off, leaving it exposed to large swings on market-moving headlines.
Next Week
There won’t be a lot of news to move the market next week, though that doesn’t mean it will be a quiet one for the markets – which will be shortened by the Good Friday holiday. We’ll get only a handful of earnings and economic data will be light, where we’ll get more info on housing and personal income and spending. There’s no telling what might come out of Washington, however, so it might be another volatile week.
Investment Strategy
The strong selloff this week has stocks near oversold (cheap) territory from a short-term perspective. However, the markets remain volatile and it’s anyone’s guess where the market will go in the short run so we’d be cautious here, though some buying on stability might not hurt.
Looking out longer remains difficult, too. While we think our economy is poised to do well, higher interest rates from the removal of the Fed’s stimulus introduces a new wrinkle and will add to the volatility. It’s tough to predict where the market will go from here.
As for bonds, their recent losses are making them look a little more attractive, too. Yields may be starting to move lower so bond prices will rise as a result.
As for the rest of the portfolio, bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates do rise.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical issues as a flight to safety.
Finally, in international stocks, we prefer developed markets to emerging ones at this time.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
However, investors were more interested in future policy actions by the Fed. The Fed still expects to raise rates two more times this year – as expected – but estimated three rate hikes next year as the economy improves. This is up from the two rate hikes originally projected. This slight difference was seen as a negative by investors and added pressure to the market.
We think these rising interest rates are key to the volatility in the markets. Low rates act like a pain killer for the market. As we saw the last several years during historically low interest rates, the market shrugged off any bad news and steadily moved higher with little volatility. Now rates are rising and the pain killer is coming off, leaving it exposed to large swings on market-moving headlines.
Next Week
There won’t be a lot of news to move the market next week, though that doesn’t mean it will be a quiet one for the markets – which will be shortened by the Good Friday holiday. We’ll get only a handful of earnings and economic data will be light, where we’ll get more info on housing and personal income and spending. There’s no telling what might come out of Washington, however, so it might be another volatile week.
Investment Strategy
The strong selloff this week has stocks near oversold (cheap) territory from a short-term perspective. However, the markets remain volatile and it’s anyone’s guess where the market will go in the short run so we’d be cautious here, though some buying on stability might not hurt.
Looking out longer remains difficult, too. While we think our economy is poised to do well, higher interest rates from the removal of the Fed’s stimulus introduces a new wrinkle and will add to the volatility. It’s tough to predict where the market will go from here.
As for bonds, their recent losses are making them look a little more attractive, too. Yields may be starting to move lower so bond prices will rise as a result.
As for the rest of the portfolio, bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates do rise.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical issues as a flight to safety.
Finally, in international stocks, we prefer developed markets to emerging ones at this time.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
