GDP looks stronger than expected for Q4, but tech worries persist and have the market still playing defense. Emotional, skittish trading could continue, so caution is warranted.
(Wednesday Market Open) A key question heading into Wednesday is whether the flagging info tech sector can turn things around. Tuesday’s steep losses wiped out the sector’s 2018 gains and appeared to spread misery across Wall Street.
Maybe a dose of positive data might help. The government said in its final estimate that Q4 GDP rose 2.9%. That was well above its prior estimate of 2.5%, and also above Wall Street analysts’ consensus of 2.6%. If you round up, that means growth continues to be near the 3% level, a definite improvement from the recent past. However, many analysts expect Q1 GDP growth to slow.
On the whole, things seem to be getting overdone as the market tries to find an equilibrium. Over the last few days, there’s been some very emotional and very skittish trading, and it looks like many people don’t want to be carrying risk into a three-day weekend. As a reminder, the market is closed Friday for the Good Friday holiday.
Before that, two trading days remain this week to see where info tech heads next. Early indications Wednesday point toward a possible rebound for the sector, as well as for some of the major industrial stocks like Boeing (BA) that have also been under pressure lately. However, recent rallies have faced tough sledding as sellers seem to have itchy trigger fingers.
The technology flu roared back with a vengeance Tuesday. Worry spread across the FAANG stocks and over to Tesla (TSLA) and Nvidia (NVDA) as well. Some of the tech stocks appeared to be reacting to specific bad news, while others may have simply fallen in part due to general negativity throughout the sector.
Facebook (FB) lost more ground as it continued to wrestle with the data security issue, and Alphabet (GOOG) shares might be sneezing from a few of those germs as well. Some analysts have pointed out that GOOG users might have similar privacy risks, and one question circulating around the market is how this might affect ad revenue for both of the tech giants going forward. The sickness spread to Twitter (TWTR) as well. FB shares have now basically lost all of the gains they had made since early last July.
The issues with FB and GOOG don’t necessarily explain, however, why shares of the other FAANGs (Apple, Netflix, and Amazon) also suffered steep losses Tuesday. Their business models are quite different from those of GOOG and FB. It just seemed like selling became contagious across this closely-watched segment of the market.
Meanwhile NVDA got hit by sellers after announcing a halt in its self-driving car project. TSLA fell more than 8% after the National Transportation Safety Board posted on Twitter it sent two investigators to look into the fatal crash of a Tesla vehicle in California last week, CNBC reported. TSLA shares are at one-year lows.
As info tech took a beating, some investors appeared to seek safety in fixed income. The 10-year Treasury yield closed below 2.8% for the first time since early last month and fell to 2.76% by early Wednesday. From a technical standpoint, the reversal in the 10-year yield from near recent highs above 2.9% a week ago to below 2.8% now looks like it might be significant. Keep watch to see how this plays out over coming days.
Though info tech suffered the most, other sectors also plunged Tuesday in a really messy day for the market. Nothing came close to the nearly 3.5% info tech losses, but financials and consumer discretionary both fell nearly 2%, continuing the recent poor showing by big bank stocks. The falling Treasury yields might have hurt banks. Traditional “safe havens” utilities and telecom were among the only sectors posting gains. The tech-heavy Nasdaq (COMP) had the day’s worst performance for the major indices with an almost 3% plunge. However, each of the biggies was down significantly, including the Russell 2000 (RUT) small-cap index and transports ($DJT).
Somewhat surprisingly, one of the stocks that’s been under the most pressure lately, General Electric (GE), had a nice bounce Tuesday. There were rumors that Warren Buffett might buy a stake, Bloomberg reported. Buffett has ventured into downtrodden stocks in the past, though the GE talk is simply speculation for now. GE shares jumped more than 4%.
Another thing to keep an eye on could be progress in solar energy after an announcement from Saudi Arabia and SoftBank (SFTBF) about the largest solar project ever, starting with an initial $1 billion investment from the SoftBank Vision Fund, of which Saudi Arabia is a prime backer. The project’s value could ultimately be high as $200 billion, CNN reported. It could be interesting to track the ramifications going forward for crude and solar power stocks.
At times like these, technical factors often take on greater significance. Last Friday, the S&P 500 (SPX) fell to within just a few points of its 200-day moving average, and then bounced Monday after failing to move below that closely-watched level. Tuesday’s losses took it back to within view of its 200-day, which now sits at around 2,587 (see chart below). That could be a number to watch Wednesday, because a move below it might trigger technically-based selling.
Crude prices had been on the upswing but slipped a bit early Wednesday on signs of growing U.S. supplies. The weekly government stockpiles report is due later this morning.
Remember the warnings about continued volatility? They appeared to be on target Tuesday as the VIX climbed more than 10% at times on Tuesday. VIX did retreat a little early Wednesday but remained above 22. Looking at Tuesday’s downward stock market action and blistering volatility, the takeaway could be that this is a market having trouble holding onto rallies. Last year, everyone seemed in the mood to buy on the way up, not wanting to miss out on more gains. The trend now seems to be the opposite, where many people are selling rallies to get out before another dip.
This trend could be especially prevalent here in the last week of the quarter, where there’s a three-day weekend ahead and many big firms are squaring up their books for Q1. In a few weeks, earnings season begins again, perhaps giving the market something firmer to hang its hat on and maybe, just maybe, easing some of this choppiness. Until then, long-term investors might want to keep themselves from focusing too much on the day-to-day moves, while daily traders might want to consider a very cautious approach.
FIGURE 1: LONG TERM TRENDLINE AND 200 DAY MOVING AVERAGE.
While uncertainty has ruled the markets in these volatile times, some chart watchers note the S&P 500 Index (SPX) has thus far failed to breach key support levels. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Inflation In Focus: Tomorrow morning sees delivery of the closely-watched Personal Consumption Expenditures (PCE) prices report for February. Remember, this is one the Fed says it watches very closely, and the market is still on tenterhooks about prices. February’s consumer price index (CPI) and producer price index (PPI) didn’t seem too alarming, and neither have recent PCE reports. For instance, in January, the PCE price index rose 1.7% year-over-year for the third straight month while the core PCE Price Index was up 1.5% for the fourth straight month.
Wall Street analysts’ consensus is for a rather mild 0.2% month-over-month rise in both the headline PCE index and core PCE prices in February, according to Briefing.com. That would actually be a slower pace than January’s 0.4% rise in the headline and 0.3% rise in core. If the data come in as analysts anticipate, it likely won’t do much to feed inflation fears on Wall Street.
Fading Europe? One supposed truism in the markets over the last six months or so — and one that’s helped push the value of the U.S. dollar down and U.S. bond yields up — is that the euro zone is in recovery. However, doubts arose Tuesday when the European Commission reported that economic sentiment slipped for the third month in a row in March. The downbeat reading paired with falling inflation expectations for consumers and manufacturers alike, as well as earlier data suggesting loan growth and money supply in euro zone had also slowed, Reuters reported. It’s far from assured, but if Europe’s economy starts to lose its grip, U.S. bond prices might see less pressure and bond yields here could stay more contained. On the other hand, weaker conditions in Europe don’t necessarily bode well for U.S. companies doing business there. The next European Central Bank (ECB) meeting is in a month.
Inflation and the Long-Term Investor: If you’re investing for the long term, inflation can be one of the biggest enemies, steadily eroding the value of your money. That’s one reason many people invest in the first place, because historically, stock markets have risen faster than inflation (though past isn’t necessarily precedent).
One thing to avoid is getting lulled into slumber by recent low inflation. Long-term investors should consider that current low unemployment has the potential to send wages up, possibly triggering a more inflationary environment. While that doesn’t necessarily mean a return of the 1970s when things got really out of hand, it is a reason to consider keeping your asset allocation in balance across various classes. Fixed income investments can sometimes suffer in an inflationary environment, while investors might be able to blunt some of the impact of rising prices with stocks that pay dividends, for instance.
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FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.
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