Who Blinked?

David Nelson, CFA

While it’s only been about 2 months since the last market all-time high signs of stress have been building for the better part of the year. Admittedly the analysis gets a lot easier when you’re looking in the rear-view mirror but make no mistake, there’s been a series rolling corrections with both Wall Street and Main Street bouncing from one sector to the next chasing return.

Sector 2018

In hindsight it would have been better to concentrate equity assets in defensive sectors like Healthcare (XLV) and Utilities (XLU) which now lead the pack YTD on a total return basis. Technology (XLK) and Consumer Discretionary (XLY) both gave up their leadership at the start of the most recent correction largely on the heels of a breakdown in Large Cap favorites like Apple (AAPL) and Amazon (AMZN) down (-29%) and (22%) respectively.

From the start of the year 2018 was looking at conflicting themes. The tax cut of course gave corporate earnings a shot in the arm and even today S&P 500 earnings growth will close the year with about 22% growth. Add the fact that U.S. multinationals would no longer have an incentive to hold the bulk of their cash overseas and in turn would be repatriating $Billions held hostage offshore, it wasn’t surprising that many stocks went parabolic coming out of the gates.

The enthusiasm fell away quickly as strong economic jobs data at home sparked fears of an endless series of rate hikes with many including yours truly believing the Fed was moving too quickly. For the moment Fed fears have taken a back seat to trade and a nearly dysfunctional Washington that seems more focused on litigation than legislation.  Despite some very positive press releases from both the administration and China regarding the 90-day window to get a trade deal done, markets have failed to hold onto any of the gains.

As Bloomberg’s article from Saturday points out President Xi is at an important fork in the road that will likely determine the fate of his nation and world trade as we know it. It’s unlikely the administration or other world leaders will capitulate to China demands. The theft of intellectual property, espionage and an endless wave of trade barriers designed to tilt the playing field in their favor has been exposed for the world to see. Like most negotiations the path forward is uncertain until one side blinks. I suspect that will be the case even with something as important at world trade.

spx support dec

Last week was an improvement over a dismal start to the month but with the exception of the Hang Seng and India’s Sensex markets around the world ended the week in the red. The tape is sloppy at best with little follow through and one sell program after another overcoming any buyers willing to stand in front of the train. The intra-day tape for Friday shows that by 10.30 were heading south with only the shallowest of rallies on the way down.

pres chuck nancy

Key tests for the market this week are holding support levels established earlier in the year that have been re-tested several times in the last few months. That’s no easy task especially considering a looming government shutdown as the debate rages between the President and Democrats over the funding of a Border Wall. About 75% of the budget that Congress controls is already funded through next September. However, Treasury, Commerce, EPA and even Homeland Security are all at risk. The administration is already making preparations for a shutdown and Democrats seem to be digging in on their side of the aisle. If history is any guide public opinion and polls will play a big role forcing one side or the other to cave. Who blinked!