Trading Places


The worst Xmas Eve stock market performance, ever - that is what CNBC commentator Bob Pisani reported.  Certainly, it was an eventful way to cap off the past few days of selling going into the last trading days of the year.


Utilities, one of the last sectors of the market to hold onto some semblance of rationality, got pummeled in today’s shortened session, down -4.2% (XLU) whereas previously pummeled financials were down only -2.1% (XLF) and the S&P 500 was down -2.7%.  High div stocks were indiscriminately torched with VIG, VYM and DVY, the three largest dividend-paying ETFS down -3% or more.  SPHD, the low vol ETF with a curated collection of the 50 least volatile stocks in the S&P, likewise got thrashed with a daily return of -3.4%.  Bonds continued their (mostly) negative correlation to equities with the AGG ETF flat on the day and long treasuries (TLT) up +0.5%.  Bonds with some equity exposure, though, were hurt with high yield and bank loans both down about -0.75% on the day.


Despite the media proclaiming all of the root causes, including political dysfunction, tightening Fed, and trade wars, all of these factors have been with us for quite a while and did not cause the pain we are seeing until the beginning of October.  Yes, a tightening Fed is likely to cause slower growth in 2019, but not to the extent that the markets are discounting.  In fact, most government statistics and corporate earnings results continued to show positive signals; the weakest signal we have seen is the trading momentum; which is like saying “the market is weak because the market is weak”.  The inverted yield curve between 2s and 5s is likely only a supply/demand artifact that includes influences from overseas markets and is not in and of itself an indicator of a pending recession.


In the face of huge market weakness, it is not reasonable to be bullish.  But, until we see more signs that something fundamental has changed (e.g., a weak PMI or LEI stat), we cannot be certain that we have entered a market with a larger prolonged downdraft.  In the absence of that, I continue to be cautious but hopeful that the fundamentals will rule the market trend and resume an upward bias.


Tony Ash