{"id":74384,"date":"2018-10-12T01:14:00","date_gmt":"2018-10-11T23:14:00","guid":{"rendered":"http:\/\/beta.next-finance.net\/opinion\/us-stocks-plunge-in-tech-fueled-rout\/"},"modified":"2018-10-12T01:14:00","modified_gmt":"2018-10-11T23:14:00","slug":"us-stocks-plunge-in-tech-fueled-rout","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/opinion\/us-stocks-plunge-in-tech-fueled-rout\/","title":{"rendered":"US stocks plunge in tech-fueled rout"},"content":{"rendered":"<p><strong>Protectionism and Fed normalization may have created the \u2018perfect storm\u2019 for market disruption<\/strong><\/p>\n<p>On Wednesday, US stocks fell dramatically, with the Dow Jones Industrial Average falling more<br \/>\nthan 800 points. The rout was led by technology stocks, with the NASDAQ Composite Index<br \/>\ndown 316 points, but all sectors experienced losses.[[Source: Bloomberg, L.P., as of Oct. 10, 2018 ]] This was the worst one-day sell-off for US<br \/>\nstocks since February. For much of the day, bonds sold off as well but, by the end of the day, a<br \/>\nflight to safety occurred in US Treasuries, sending yields lower. <\/p>\n<p><strong>What drove the sell-off?<\/strong><\/p>\n<p>Stocks began losing ground last week as the yield on the 10-year US Treasury spiked, helped by<br \/>\ncomments from US Federal Reserve (Fed) Chair Jay Powell, who suggested that the Fed could<br \/>\nraise rates significantly before finishing its rate hike cycle. Also placing downward pressure on<br \/>\nTreasury prices has been balance sheet normalization as well as higher debt issuance as a<br \/>\nresult of the US government running a larger deficit. As we have seen before, any significant<br \/>\nincrease in the 10-year yield typically results in a re-rating of stocks. Less than a month ago,<br \/>\nthe yield on the 10-year was 2.991% but since then it has risen rapidly, rising above 3.2% in the<br \/>\npast week.[[Source: Bloomberg, L.P., as of Oct. 10, 2018 ]] Given that the tech sector has posted such strong returns in the past several years,<br \/>\nit should not come as a surprise that it experienced a more severe re-rating than other sectors.<\/p>\n<p>However, I also believe there is another reason for the sell-off: the growing trade wars. At times<br \/>\nin the past year, protectionist threats and actions have sent stocks modestly downward, but<br \/>\ninvestors have been all too willing to believe the threat has passed at the first sign of an<br \/>\nabatement in trade drama. For example, after trade worries put downward pressure on stocks<br \/>\nearlier this year, Chinese President Xi Jinping\u2019s conciliatory speech at the Boao Forum in March<br \/>\nwas all investors needed to hear to send stocks upward. Realistically, this asymmetric reaction<br \/>\nto trade developments \u2014 i.e., overreaction to positive trade news and underreaction to negative<br \/>\ntrade news \u2014 was not sustainable. In addition, negative consequences from the ongoing USChina<br \/>\ntrade conflict had not yet appeared in the data, especially in the US where the economy<br \/>\nis accelerating, giving markets another reason to discount the threat. But that has started to<br \/>\nchange. This week, the International Monetary Fund (IMF) downwardly revised its estimates for<br \/>\nglobal growth, as well as growth for China and the US, as a result of the escalation in trade<br \/>\ntensions: <\/p>\n<ul>\n<li>  The IMF projects that long-term gross domestic product (GDP) for the US and China will<br \/>\neach decline 0.3% as a result of all the tariffs implemented as of September 2018.2<\/li>\n<li> It expects long-term US GDP to decline 0.5% and long-term China GDP to decline 0.55% if<br \/>\nthe US imposes its threatened 25% tariff on an additional $267 billion in Chinese goods,<br \/>\nand China retaliates.[[Source: International Monetary Fund]]<\/li>\n<li> In addition, it expects long-term US GDP to decline 0.9% and long-term China GDP to decline 0.6% if the US imposes its threatened 25% tariffs on cars and parts, and then trading partners retaliate.[[Source: International Monetary Fund]]<\/li>\n<li> The IMF of course expects this to have a negative impact worldwide, with long-term<br \/>\nglobal GDP projected to decline 0.4% if all tariffs discussed above are implemented.[[Source: International Monetary Fund]]<\/li>\n<li> The IMF expects the impact of the current trade conflict to be felt in 2019: its estimate<br \/>\nfor US GDP growth was downwardly revised to 2.5% from 2.7%, while China GDP growth<br \/>\nwas downwardly revised from 6.4% to 6.2%.[[Source: International Monetary Fund]]<\/li>\n<\/ul>\n<p>In addition, companies are beginning to report that tariffs are impacting their businesses. On<br \/>\nWednesday, US-based industrial supply company Fastenal reported earnings and discussed the<br \/>\nheadwinds being created by the trade conflict, in particular sharing that the most recent tariffs<br \/>\nare <em>\u201cdirectly impacting the North American supply chain for our customers.\u201d<\/em>[[Source: Bloomberg, as at Oct. 10, 2018]] This disruption of<br \/>\nglobal supply chains has been a major concern for economists and strategists. <\/p>\n<p>As the Cato<br \/>\nInstitute explained in a commentary earlier this year, <em>\u201cWhereas in the 20th century, most of a<br \/>\ncompany\u2019s production and assembly took place in one location, often under one roof, the<br \/>\nfactory floor has since broken through those walls and now spans borders and oceans. Taxing<br \/>\nimports today is akin to erecting a wall through the center of that 20th century assembly line,<br \/>\nimpeding production and raising costs in similar fashion. That helps explain the preponderance<br \/>\nof opposition among US manufacturers to Trump\u2019s trade tack. US tariffs raise their costs, and the resulting retaliation from foreign governments will reduce their export revenues, squeezing<br \/>\nprofits from both ends.\u201d<\/em>[[Source: Cato Institute, as at Jun. 22, 2018]]\n<p><strong>What are the investment implications?<\/strong><\/p>\n<p>There are concerns afoot that this could be the start of a market correction, and it may very<br \/>\nwell be. I have warned about the likelihood of a sell-off in the back half of the year that<br \/>\nresembles the February sell-off \u2014 meaning a sharp but relatively swift sell-off and then the<br \/>\npotential for a recovery.<\/p>\n<p>In a survey we at Invesco conducted both before and after the February sell-off, we found that<br \/>\ninvestor confidence in stocks diminished after the sell-off \u2014 in the first quarter, 80% of investors<br \/>\nfelt it was a good time to invest, but that declined to 69% in the second quarter. To me, this<br \/>\nsuggests investors may flee stocks at the first sign of trouble.<\/p>\n<p>And so I believe there will be some contagion in the near term \u2014 indeed, Asian stocks are<br \/>\nalready down.[[Source: Bloomberg, L.P., as of Oct. 10, 2018 ]] I expect a significant sell-off that extends internationally, although I expect the<br \/>\nUS will feel the most pain. Having said that, earnings season is likely to be strong, in my view,<br \/>\nwhich would provide some support for stocks and may help them rebound relatively quickly. <\/p>\n<p><strong>What is our outlook on the situation?<\/strong><\/p>\n<p>I have been warning for more than a year that the two key risks to the economy and markets<br \/>\nare normalization by the US Federal Reserve and protectionism. It seems that these forces are<br \/>\nboth at play, creating something of a \u201cperfect storm\u201d that is causing market disruption. Having<br \/>\nsaid that, longer-term investors, especially institutional investors, need capital appreciation<br \/>\npotential in order to achieve investment goals, and so in my opinion they should maintain<br \/>\nexposure to risk assets, but with an emphasis on downside protection.<br \/>\n Therefore, this could<br \/>\ncreate an opportunity for active management, especially in certain asset classes.<\/p>\n<p>I have also been warning that these risks underscore the importance of broad diversification \u2014<br \/>\nthat means diversification within equities (by region and factor) and fixed income (by sub-asset<br \/>\nclass) but also adequate exposure to alternative asset classes, which have historically exhibited<br \/>\nlower correlations to equities. Unless an investor has a short time horizon, I believe it is<br \/>\nimportant to maintain exposure to a broadly diversified investment portfolio that includes risk<br \/>\nassets. In addition, tactical investors can take advantage of buying opportunities created by the<br \/>\nsell-off. <\/p>\n<p><strong>What are we watching out for?<\/strong><\/p>\n<p>We will want to follow the trade situation closely. If it deteriorates significantly, a reduced<br \/>\nexposure to risk assets may be warranted. <\/p>\n","protected":false},"excerpt":{"rendered":"<p>On Wednesday, US stocks fell dramatically, with the Dow Jones Industrial Average falling more<br \/>\nthan 800 points. The rout was led by technology stocks, with the NASDAQ Composite Index<br \/>\ndown 316 points, but all sectors experienced losses. This was the worst one-day sell-off for US<br \/>\nstocks since February. For much of the day, bonds sold off as well but, by the end of the day, a<br \/>\nflight to safety occurred in US Treasuries, sending yields lower. <\/p>\n","protected":false},"author":1,"featured_media":74382,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1480],"tags":[1663,1655,1943,1657,1651,1437,2087,2068],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/74384"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=74384"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/74384\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/74382"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=74384"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=74384"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=74384"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}