Stocks and Treasury yields took a dive Monday as uncertainty flared again in the U.S./China trade war. Caution seems to be the watchword as more investors have started embracing fixed income.
(Monday Market Close) After a day like today, many investors might feel the urge to flee for the hills. What’s important, however, is to keep things in perspective.
Sometimes these are one-day events, and we’ll find out tomorrow if that’s the case. However, a quick bounce back would probably raise the chances of ultimately revisiting today’s lows, so it might be healthier for the market if this plays out over a few days and people can start taking a broader view and determining stock market winners and losers. One idea might be to let it play out for a bit and watch what happens, without making any sudden moves from a position of fear.
All things considered, it’s been a pretty good year for stocks, but the market hates uncertainty and that’s the primary overhang as people contemplate the trade picture with China. We’re not used to seeing the sausage get made right in front of us. What used to be hidden behind closed doors is now done right out in the open, and it may not be pretty at times. This is one of those times.
Those without a lot of market experience tend to go all in or all out at times like these, but veteran investors often go part-way in and part-way out. While cutting back one’s exposure to stocks can sometimes be a fine thing to do, it also helps to have a plan, know your ultimate goals, and let some time pass before making big decisions after a day like Monday.
For those surveying Monday’s carnage and wondering if there are reasons to stay in the market, it might be worth considering a few things:
All that said, it looks like some investors might be changing their portfolios to build in more of a cautious outlook.
The July Investor Movement Index (IMX®)—TD Ameritrade’s proprietary, behavior-based index that measures what investors actually were doing and how they were positioned in the markets—showed retail investors getting out of the so-called FAANG stocks, particularly Apple (AAPL)—which were in vogue for so long, and buying fixed income for the second month in a row.
What’s interesting about the fixed-income buying is it that it was mostly shorter-term, with maturities of six months or less. That could be a sign that many retail investors want to put their money back into stocks, just not at the prices where stocks were trading up near recent highs.
Looking at stock performance on Monday (if you can bear to), the so-called “cyclical”sectors including Technology, Financials, Energy, Communication Services and Industrials all got hammered, but Utilities, Health Care and Materials outperformed the rest of the market. That is, if you can really use the word “outperform” to describe drops of worse than 2% for some of those sectors.
Also, gold, the Japanese yen, and VIX all rallied, and bonds continued to climb. Sometimes these instruments are seen as key risk barometers, and tend to rise when the market gets cautious.
The 10-year yield (which descends as the underlying Treasury note climbs), finished Monday at just above 1.73%. Thats nearly a three-year low and isn’t too far from the long-term trough below 1.4% carved in the summer of 2016, back when Brexit fears first surfaced. Speaking of which, that could be another factor hurting markets right now, with the next Brexit flashpoint coming down the line Oct. 31.
All this “flight to safety”—as if any investment is safe, which isn’t the case—is pretty much what the market normally does when geopolitics flash red. In that sense, things are happening the way they’re arguably supposed to.
Overall, it doesn’t look like investors are really spooked, and it’s worth noting that some buying interest did appear in the last 40 minutes of Monday’s session, allowing the major indices to close above their intraday lows. It’s anyone’s guess, of course, if any of that momentum can carry over into Tuesday.
Semiconductors and Apple (AAPL), which have huge exposure to China, fell dramatically, probably to the surprise of few. Financials took a beating thanks in part to the sharp drop in Treasury yields, where the 10-year yield is now well under the S&P 500 dividend yield. That could be something that’s steering some investors into the defensive parts of the market like Utilities.
Energy got clobbered even though crude prices didn’t fall nearly as much as stocks. Crude might have gotten propped up by recent sharp drops in U.S. stockpiles and more tension in the Persian Gulf over the weekend.
As the week moves on, stuff to watch for is any sign of renewed investor interest in more of the cyclicals and any potential revival, however small, in the 10-year yield. Both would be important signs of optimism.
A continued standoff in the trade war would probably prevent stocks from retesting recent highs anytime soon, and people might be less eager to pile back in on any good news. There’s likely be some muscle memory as people consider what happened the last time there was good news on the trade front, which was after the G20 summit in June. That rally, which took the market to new highs on hopes of a trade thaw, is the one being taken apart now amid new tariffs and as investors express concern over China allowing its currency to fall.
Check out all of our upcoming webcasts or watch one of the many archived ones, covering a wide range of topics from market commentary to portfolio planning basics to trading strategies for active investors. No matter your experience level, there’s something for everybody.
Looking to stay on top of the markets? Check out the TD Ameritrade Network, which is live programming that brings you market news and helps you hone your trading knowledge. And for the day’s hottest happenings, delivered right to your inbox, you can now subscribe to the daily Market Minute newsletter here.
TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc. are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation. TD Ameritrade Media Productions Company is not a financial adviser, registered investment advisor, or broker-dealer.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Historical data should not be used alone when making investment decisions. Please consult other sources of information and consider your individual financial position and goals before making an independent investment decision/
The IMX is not a tradable index. The IMX should not be used as an indicator or predictor of future client trading volume or financial performance for TD Ameritrade.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2019 TD Ameritrade.