Equity sell-off accelerates

By David Morrison  |  20/11/2018 16:02

Global stock indices continued their decline on Tuesday. Retail stocks followed tech lower as disappointments from ‘bricks and mortar’ stores round off the earnings season
 
The sell-off in the US tech sector has been brutal. Ahead of today’s open, Apple traded at its lowest level in over six months and has now fallen 23% from its all-time high hit in early October. Other FAANG constituents (Facebook, Amazon, Apple, Netflix and Google/Alphabet) have also been hit hard as investors continue to bail out of this small group of companies which has been responsible for so much of the gains and overall market leadership for a number of years now.
 
Retailers report
 
But it’s not just the tech sector that is suffering. We’ve also seen significant declines in financals and industrials as investors worry about higher interest rates and slowing global growth. In addition, we’re now getting to the end of the third quarter earnings season and this is when we see results from the big ‘bricks and mortar’ retailers. Ahead of today’s open there were sharp falls in the share prices of Kohl’s, Lowe’s and Target on a mixture of disappointing forward guidance, comparable store sales, or misses to earnings and/or revenues. So far, only lectronics retailer Best Buy has managed to buck the trend with a solid set of earnings and revenues. Adding to retailers’ woes, after yesterday’s close, L Brands (owners of nylon tat purveyor Victoria’s Secret) fell after the company announced it was cutting its dividend. Walmart fell for a second day after reporting lower-than-expected revenues on Monday.
 
Black Friday
 
All this comes ahead of the most important month of the year for retailers. ‘Black Friday’ follows the US Thanksgiving holiday on Thursday and then that leads straight into the four weeks before Christmas. There are already concerns that over-indebted consumers will be in no mood to max out their credit cards as they worry about higher interest rates. These feed straight into such major expenses as mortgages and car loans, so reducing consumers’ capacity to spend. On top of that, weather forecasts suggest that a cold snap is on its way which could also depress consumer spending on disretionary items.
 
Why sell now?
 
There are a number of reasons for the current sell-off. Firstly, despite many companies beating analysts’ forecasts on earnings, the third quarter has disappointed. There have been some significant misses on revenues, while a number of companies (Amazon for example) have warned that trading conditions look increasingly difficult going into the fourth quarter. There’s also a tangible fear that the third quarter could prove to be “as good as it gets”, particularly given the spectacular results seen in the fourth quarter of 2017, and first quarter 2018, which won’t flatter the year-on-year comparisons. On top of this, there are concerns about slowing global growth. Last week Fed Vice Chairman Richard Clarida and Dallas Federal Reserve President Robert Kaplan both expressed caution over the global growth outlook. Recent GDP data indicates slowing economic growth from China and the Euro zone. But perhaps of even greater significance (given that GDP data is backward-looking and is subject to frrequent revision) are what’s going on in commodity markets. Crude oil slumped again today, taking WTI to its lowest level in over a year. Last week the International Energy Agency (IEA) said that while US demand for oil has been “very robust,” demand in Europe and developed Asian countries “continues to be relatively weak.” The IEA also warned of a slowdown in demand in developing nations such as Argentina, Brazil and India. Meanwhile, copper and lumber prices remain depressed and the reason why is clear to see looking at recent US housing data.  
 
Fed turning dovish?
 
It could be that investors take some cheer as the Fed appears to turn less hawkish. Certainly, many would welcome a pause in Fed rate hikes, but not if they pause for the wrong reasons.  The US central bank has cited low unemployment, inflation at target and strong US economic growth as reasons for tightening monetary policy. However, with the outlook for China, the Euro zone and emerging markets looking increasingly uncertain, a pause in rate hikes tells investors that the Fed’s optimism may be misplaced. As the ongoing tariff battle between the US and China clearly demonstrates, the US doesn’t operate economically in splendid isolation. If the rest of the world is slowing down, the US will too. On top of this, Trump’s era of fiscal stimulus in the form of tax cuts,  overseas profit repatriation and cuts to business regulation has come to an end with the Democrats now in charge of the House of Representatives. At the same time, all that stimulus was effectively a ‘one-off’ event and the effects will no longer show up in corporate profits.
 
200-day moving averages
 
So investors are looking increasingly nervous going into Thanksgiving, typically a time of year that sees equities rally into the holiday. That doesn’t mean we won’t get a bounce from current levels. But it would require some very large volumes to drive the major US indices back above their respective 200-day moving averages.
 
 
 
 
 
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