Let’s Make a Deal
By John Stoltzfus,
Chief Investment Strategist
Ten Years After Lehman’s Collapse
What’s the market telling us?
Prospects for an escalation of the trade fracas with China along with not much progress to speak of in trade talks with Canada helped take the wind out of stocks stateside and around the world last week. Ironically solid jobs and wage growth and low unemployment levels in last Friday’s brace of data released by the US Labor Department was received by investors less as a boost to sentiment and offset to trade concerns but instead as a source of worry about just how much higher the Fed may have to raise rates.
The Dow Jones Industrials, the S&P 500, the S&P 400 (mid-caps), the Russell 2000 (small-caps) and the NASDAQ Composite (some 40% weighted in tech or tech related stocks) respectively moved lower on the week 0.2%, 1.03%,0.9%, 1.6% and 2.6%.
On a year to date basis the performance of the major US indices remains good with the Dow Jones Industrials, the S&P 500, the S&P 400, the Russell 2000 and the NASDAQ Composite respectively up on a year to date basis: 4.8%, 7.4%, 6.7%, 11.6% and 14.5%.
Taking the year to date numbers into account, last week’s pull-back would appear to be markets finding justification to take some profits after a nice run-up during second quarter earnings season. Last week’s performance among the sectors of the S&P 500 (see page 5 of this report) would also indicate that investors took the opportunity to rotate and rebalance positions to favor the defensive sectors over the cyclicals last week. Taken in this context, last week’s move to the downside looked healthy for the market.
“Another potential “mood changer” that could rally stocks we’d expect would be any clarity or resolution of trade issues. ”
Tech Stocks Hit by Rotation and Tariff Concerns
Technology stocks were particularly mistreated last week with the S&P 500 Information Technology sector declining some 2.9% in the period. The decline was attributed in part to potential trade impact on the sector as well as investor concerns tied to regulatory risks and congressional hearings conducted last week in Washington on the implications of technology’s increasingly ubiquitous role in the lives of businesses and individuals.
Notwithstanding last week’s decline, the S&P 500’s tech sector is up 16.5% on a year to date basis. The resilience of the sector has been tested several times this year in each quarter with subsequent rallies lifting the sector to new highs indicating to us that the sector remains prone to the effects of rebalancing, rotation and profittaking whenever impatient market participants see justification to take such action.
With trade concerns on the front burner and the Federal Reserve’s expected Fed Fund rate hikes on the side burner we’d expect the next opportunity for attention grabbing upside in stock prices could be delayed until third-quarter earnings seasons starts up in a few weeks. Another potential “mood changer” that could rally stocks we’d expect would be any clarity or resolution of trade issues.
International Stocks Slide Further
International equities continued under pressure last week as many international economies (developed, emerging and frontier) depend on exports to the US for growth.
A relentlessly strong dollar (as measured by the DXY index) is up 3.6% year to date and up 7.7% from a low on February 14th of this year and has raised concern about foreign issuers of dollar denominated debt.
For US dollar-based portfolios, foreign holdings have been a drag on performance as a strong dollar negatively impacts returns on foreign securities when translated into US dollars.
Last week MSCI EAFE (developed international markets ex-US and Canada), MSCI Emerging Markets, MSCI Frontier Markets and MSCI All World Markets (ex-US) respectively declined 2.9%, 3.1%, 0.7% and 2.9% as a jump in trade tension hit sentiment hard.
On a year to date basis MSCI EAFE (developed international markets ex-US and Canada), MSCI Emerging Markets, MSCI Frontier Markets and MSCI All World Markets (ex-US) are respectively off 7.1%, 11.7%, 15.6% and 8.2%. It would appear to us that the international markets are likely to remain hostage to trade and tariff risk for now but will likely be candidates for significant opportunities to rally when trade issues are resolved.
A Decade after Lehman
With the 10th anniversary of the demise of Lehman Brothers upon us much has been written about the causes of the crisis that led to the drama and pain that came to the fore in September of 2008. Of all our memories of the events that took place in that period the most memorable in our recollection was the relentless short selling that occurred in the period leading up to the autumn of 2018 and through the fourth quarter. Officials finally did stop the naked shorting of stocks as we recall via a protective mechanism that precluded the shorting of financial stocks that had been so damaging to the markets and subsequently to the economy.
What we also recall quite vividly was the dedicated and successful efforts of then-Secretary of the Treasury Hank Paulson and former Chairman of the Federal Reserve Ben Bernanke to stem the turmoil and initiate a process of healing that helped the economy and the markets recover in the years that followed.
While politicians from both side of the aisle, particularly around election time, might be prone to take credit for the economy’s and markets’ recoveries and the eventual economic growth we currently enjoy, we suggest it’s Ben Bernanke and Hank Paulson who deserve the thanks most.
Beyond the Lehman Brothers 2008 anniversary most important is the 17th anniversary of the attack on the World Trade Center and the Pentagon that occurred on September 11th 2001. We remember those who lost their lives on that day and in particular the selfless sacrifice of so many first responders and we revere their memory.
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