Yet again, large-cap tech stocks — including those known colloquially as the “FAANGs,” which combines the likes of Amazon.com, Inc. (NASDAQ:AMZN) and Facebook Inc (NASDAQ:FB) — came under heavy selling pressure as the momentum-driven froth of the past few months is rapidly unwound. And for the second day, magically just as the situation was looking dire, dip buyers swooped in to cut the losses.
In the end, the Dow Jones Industrial Average lost 0.1%, the S&P 500 lost 0.2%, the Nasdaq Composite lost 0.5% and the Russell 2000 lost 0.5%. Treasury bonds were weaker, the dollar was stronger, gold lost 1.7%, and oil fell 0.6%..
But the damage was done.
The FAANGs closed below Wednesday’s lows set after the Federal Reserve raised interest rates, promised another rate hike before the end of the year, and teased the start of a drawdown of its $4.4 trillion balance sheet. The catalyst for the day’s decline: Lingering concern about the Fed’s tightening pace as well as the reappearance of “Trump impeachment” risk after the Washington Post reported the president is allegedly under investigation for obstruction of justice.
Breadth was negative, with 1.6 decliners for every advancing issue on the NYSE while volume was in line with recent trends. Defensive utility stocks led the way with a gain of 0.6%, while materials were the laggards, down 0.9%.
Yet, amid the broad market complacency, the bond market is having a nervous breakdown as the gap between short-term and long-term yields collapses — a clear sign that the single largest market in the world (U.S. Treasury bonds) is suddenly very worried about the future of the U.S. economy.
Yesterday, I railed against the ridiculousness of the situation given how the stock market is ignoring the looming end of the single impetus for the relentless upward surge of the last four years: global central bank largesse.
It’s changing now, with the unemployment rate at 4.3% and pretty much every single financial asset class at or near record highs, record tights, or record low yields. The Fed is turning hawkish, the European Central Bank and the Bank of Japan is running out of long-term bonds to buy, and Beijing is clamping down hard on its shadow banking problem.
There’s more. Valuations are extended. There’s been no major legislative push from the Trump White House. And a renewed drawdown in crude oil prices is set to weigh on Q2 corporate earnings.
Even the justifications used to rationalize the surge in big-tech stocks are wearing thin. The Apple Inc. (NASDAQ:AAPL) “Homepod” smart speaker is generating absolutely zero buzz. Canaccord analysts downgraded Google parent Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) on high valuations and a belief THAT ad load increases on mobile search and YouTube over the previous two years will be hard to repeat. Netflix, Inc. (NASDAQ:NFLX) is dealing with higher production costs, increased competition, and tepid user growth.
Stock bulls should pay attention, as we’re long overdue for a typical 10% correction; the macroeconomic data deteriorating at a pace not seen since the 2011 U.S. credit rating downgrade and is currently missing analyst estimates at a level not seen since the February 2016 energy price meltdown; seasonality sucks right now (June is one of the weakest months of the year and the May-October time frame is poor); and sentiment is off-the-charts extreme.
How about this: Let’s consider what it would take to get bullish here.
It would take the Fed backing away from its hawkish tightening campaign, the mainstream media and the Democrats dropping the “Trump-Russia-obstruction” meme, it would take progress on tax cuts, healthcare reform and infrastructure spending, and it would take a re-acceleration of loan growth here at home and in China.
But above all, it would take a weakening of U.S. Treasury bonds and an upward reversal in long-term yields. Without that, I’ll continue to listen to the cautiousness expressed by bond traders; and discount the perma-optimism of equities.
As an aside, there is money to be made either way. The iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSEARCA:TLT) — typically just a yield play on longer-dated Tresauries — is up nearly 6% year-to-date. More aggressive plays are doing even better, such as the ProShares Ultra Treasury Bond (NYSEARCA:UBT), which is up 12% year-to-date!
It’s an important and profitable lesson, to be sure: Aware and agile investors can make the most of any market situation.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.