Stocks got downright ugly on Wednesday. So much so that going into the final half hour, the Dow Jones Industrial Average had plunged some 720 points, or more than 2.7%.
What makes the day’s sell-off more uncomfortable and potentially worrisome going forward is that it comes after more than a week of strong selling, and one that’s shaved off more than 4% of the Dow’s value over the past five trading sessions.
And it’s not just the Dow. The S&P 500 and NASDAQ Composite are similarly lower, with the tech-heavy NASDAQ leading the charge into the red and down nearly 7% over the past week.
And speaking of tech, that sector is down some 3.5% today, as the Technology Select Sector SPDR (XLK) now has plunged precipitously below support at the short-term 50-day moving average.
So, what’s the main culprit causing investors to de-risk in droves here?
Well, the first cause is the one grabbing most of the financial news headlines, and it’s the sharp and sudden rise in Treasury bond yields. The yield on the benchmark 10-Year U.S. Treasury Bond now is at 3.22%, a level not seen in about seven years.
Then we have a Federal Reserve that has stayed committed to raising interest rates. Recent comments by Fed Chair Jerome Powell, in which he said that the Fed could go “past neutral” and that he thought rates were “a long way from neutral at this point,” raised concerns that monetary policy would become too strict, and that this could be a chokepoint for the economy.
Another reason for the market tumble was Monday’s earnings warning from bellwether chemical firm PPG Industries (PPG). The makers of specialty paints and coatings warned that earnings would be weaker in both Q3 and Q4. More importantly, the company cited every worry that keeps market analysts like me up at night, such as higher input costs and reduced international demand for its products weighing on its bottom line.
Rising interest rates are one thing, but markets can handle that if the reason for rising rates is a stronger U.S. economy, strong jobs growth and a robust U.S. dollar.
Yet if corporate earnings from industrial bellwethers are about to come in substantially softer than expectations, then that means that one of the key pillars that’s buttressed this rally for the past year and a half now is under threat.
Over the next couple of weeks, we’ll see the actual third-quarter numbers coming from many of Wall Street’s biggest names. If the collective corporate outlooks are timid, weaker than expected or just too cautious, then that will be a reason for more risk-off trading in this market.
That means you should expect to see some of the froth come off the highest-valuation sectors, i.e., technology, semiconductors, biotech and other growth sectors. That also means we expect to see flight-to-safety sectors such as utilities, consumer staples and value stocks outperform. That’s largely the rotation we saw today, and if this continues, it will change the complexion that’s colored the 2018 market.
Finally, I had a friend call me mid-morning (when the Dow was “only” down 500 points) and ask me why this sell-off was taking place.
My answer was that the real question he should be asking was why it took so long for a pullback to finally occur.
Markets don’t keep making record highs forever.
I know it may seem like that if you suffer from recency bias in the 2018 market, but remember that volatility, fear and accelerated selling are all part of the normal ebb and flow of markets.
Does it feel bad to be long stocks on a day like today?
You better believe it does! I know I’ll be reaching for the Advil later today. Yet when my headache subsides, and the markets are closed, I’ll also be digging through the detritus, looking for great companies selling at a discount compared to where they were just a week ago today.
I recommend you do the same.
On days like today, wouldn’t it be nice to know you had a plan in place to tell you if it’s time to sell stocks? That’s what subscribers of to my Successful Investing advisory service have, and it’s why I think they’ll be sleeping a lot better tonight than investors who are just rolling the dice. To find out more, check out Successful Investing today!
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