Weekly Market Analysis: Tech Stocks Face Volatility Amid Fed Concerns & Economic Uncertainty

The global equity correction picked up steam this week. A hawkish Fed tone caused rates to initially spike, there were concerns over slowing global growth, and trade tensions weighed on markets.

Early in the week, there was indiscriminate selling of both stocks and bonds, with popular momentum and technology stocks leading the way down. The start of the Q3 earning season is also causing some angst as investors question if lofty earnings growth estimates are sustainable in the face of peak margin concerns from input price pressures.

Weekly Return

S&P 500: 2,767 (-4.1%)
FTSE All-World ex-US (VEU): (-3.38%)
US 10 Year Treasury Yield: 3.15% (-2.48%)
Gold: $1,222 (+1.36%)
EUR/USD: 1.156 (.3%)

Major Events

• Monday – The International Monetary Fund cut its global economic growth outlook for the next two years citing NAFTA, Brexit, and continued trade war uncertainties.
• Monday – Tensions rose between the European Union and Italy over Italy’s budget and U.S.-China strains escalated during the U.S. Secretary of State Mike Pompeo’s visit to Beijing.
• Tuesday – U.S. Treasury Yields hit a seven-year high.
• Wednesday – Technology companies had their worst day in seven years.
• Thursday – The global market rout continued across major equity indices with the S&P 500 notching its sixth straight day of losses.
• Thursday – The U.S. Treasury concluded that China is not manipulating the Yuan in their report to U.S. Treasury Secretary Steve Mnuchin.
• Friday – The IMF and World Bank meetings began in Bali Friday.
• Friday – Wells Fargo, J.P. Morgan, and Citi Group kicked off earning season with earnings that beat analysts’ expectations.

Our Take

There was plenty of market news to digest this week, but we believe that two key independent speeches by prominent U.S. figures played a major role in triggering the spike in this week’s volatility.

The first was from Fed Chairman Jerome Powell, who on October 3rd said, “We may go past neutral [interest rates], but we’re a long way from neutral, probably.” This confirmed for many, a real shift to a less accommodative Fed and the likelihood of more rate hikes. As a result, interest rates spiked across the yield curve, bond prices fell, and equity investors reconsidered how stocks will fare with higher rates; a stark contrast to the zero-interest rate environment enjoyed during much of this bull market.

The second was from Vice President Mike Pence, who a day later announced a tougher policy on China and declared in a combative speech that the United States would “not stand down”. The speech included a wide range of accusations delivered by Pence that claimed, “Beijing is employing a whole-of-government approach, using political, economic, and military tools, as well as propaganda, to advance its influence and benefit its interests in the United States.” At a minimum, the implications suggest little optimism for a resolution on trade conflict anytime soon.

U.S. stocks remain modestly up for the year, but global stocks (X U.S.) are down around 10%. Market pullbacks are to be expected, but predicting their length and severity is a fool’s game. Instead, they serve as an important reminder of the risks associated with making concentrated bets in the market. Crowded trades, like the current popularity of momentum and technology stocks are especially susceptible to market corrections. We reiterate our view that a balanced and diversified approach to investing geared toward limiting damages of market corrections, like we saw this week and over the long term, is superior. If nothing else, we believe this should be a wakeup call for those who are heavily concentrated to reassess the risk in their portfolio.