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Market Update

Late Day Blues: Financials, Tech Lead Stocks Lower; Volatility Spikes

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March 23, 2018

(NOTE TO READERS: JJ Kinahan is on vacation today, so the following is a guest Market Update column by Shawn Cruz, Manager, Trader Strategy at TD Ameritrade).

(Friday Market Close) The last hour of the day was again the cruelest on Friday, as markets toppled from earlier gains and closed out the week with a combined two-day drop of more than 1,000 points in the Dow Jones Industrial Average ($DJI). That venerable index is now near the early February intraday low after the worst week in more than two years.

Financial and info tech sectors took the deepest dive Friday, but weakness swept across the entire spectrum amid, what else — more jitters over a possible U.S.-China trade war. There’s widespread concern that the tit-for-tat tariffs could weigh on profits for many U.S. exporting firms, particularly some of the major industrial, info tech, and materials companies.

Another fear, though not confirmed, is that China might decide to retaliate by pulling back on purchases of U.S. Treasury bonds. That fear gained traction Friday when the Chinese ambassador to Washington replied to media inquiries about bond purchases by saying his country would “take all measures necessary,” and is looking at every option.

Earlier this year, banks and info tech led the charge upward, getting a tailwind from what appeared to be synchronized growth between the U.S., Asia, and Europe. Now those two sectors are leading the charge lower, and the market seems to be struggling to find a positive leader to replace them. It’s an old market adage that a rally is hard to sustain without financial leadership, and financials are definitely hurting at this point. The sector is now lower for the year. See figure 1 below.

Financials were the worst of the worst on Friday, falling about 3%. Info tech, weighed down once again by reeling shares of Facebook (FB), took a 2.7% plunge. Not a single sector finished in the green, and only energy avoided a loss of 1% or more.

With info tech struggling, the tech-heavy Nasdaq had the worst day of any of the big indices. Meanwhile, investors appeared to be seeking shelter in fixed income, where 10-year Treasury bond yields fell below 2.82% by the end of the day after trading up near 2.93% earlier this week. Gold also began to attract some buyers, and the Japanese yen — another investment some see as a potential “safe haven,”  is at its highest level in over a year.

As we’ve seen in past sell-offs, the biggest selling waited until the last part of the session. The Dow Jones Industrial Average ($DJI) had been up as much as 150 points at midday after President Trump signed a $1.3 trillion budget agreement that averted a government shutdown. Then investors appeared to get a case of cold feet as the weekend approached. The entire psychology of the market seems different than last year, when traders often stepped in to buy dips. Now the mood appears to be one where people start piling on when there’s selling, perhaps afraid of having to sell at even lower prices down the road.

Volatility hitched up again this week, as the VIX rose nearly 10% to above 25. It’s now at the highest point since early this month. Just a week ago VIX had fallen below 16. It’s not too hard a call to expect more volatility next week, especially since it’s the last week of the quarter and some fund managers might begin the process of evening positions as March winds down. Also, there’s little in the way of fresh data or earnings next week, meaning markets may continue to focus on events off of Wall Street, which could mean playing to the tune of turbulence in Washington, D.C.

That turbulence — namely the tariff issue but also the White House staff shake-ups — didn’t go unnoticed this week. One potentially positive thing is getting the budget signing out of the way. There was some volatility early Friday when it appeared the budget might get vetoed.

One key data point next week is the government’s final estimate on Q4 gross domestic product — due Wednesday morning. Wall Street analysts’ consensus is for 2.6% growth, up from the previous government estimate of 2.5%, according to Briefing.com. Consumer confidence on Tuesday and personal consumption expenditure (PCE) prices on Thursday also stand out. The markets are closed next Friday for the Good Friday holiday, so it’s a shortened trading week.

For long-term investors, the turmoil can be frustrating to watch. At times like these, consider reminding yourself that if you’re in the market for the long term, you don’t need to worry about every headline or even a particularly bad quarter. That’s not permission to stop paying attention; far from it. However, it’s important to keep things in perspective. With the end of the quarter approaching, this weekend might be a good one to consider looking through your holdings and making sure you’re comfortable with your asset allocation. Fixed income and dividend investments may not be as exciting as stocks, but also can play an important role in helping balance a portfolio.

Financials

FIGURE 1: FINANCIAL SECTOR TAKES IT ON THE CHIN.

Though the downturn in the S&P 500 financial sector (XLF) began March 12, selling picked up steam this week. 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.

All the best,
Shawn

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