US equity markets, the Dow Jones, S&P 500 and Nasdaq are all breaking down. The strength of the US dollar, the shape of the yield curve are in focus and now we are moving from a world of strong US growth to a new world of average US growth – investors are adjusting positions accordingly. Today, the Dow dropped 500 points, and there is more pain to come.The new market drivers are rate hikes, trade wars and a realization that the US economy is slowing down, possibly to 2.0 percent or less in 2019.
At Classiarius we are looking at monetary policy (tightening), fiscal policy (fading) and trade policy (fighting) – everything is clearly telegraphed from policy makers. These predictable policy moves are driving the US economy back to average growth and as long as there are no policy mistakes, the US economy will see no real shock to the system.
On Tuesday the Dow Jones Average fell 5180 points to 24,465.64 and the S&P 500 fell 1.8 percent. The tech-heavy Nasdaq fell 1.7 percent. Keep in mind that the Dow dropped 395 points on Monday. As well telegraphed policy changes take place, and as part of is the Trump/China trade war will hurt manufacturing, US equity markets will continue to come under pressure.
While we view the October decline as a natural market adjustment, that clearly had a strong technical component, the current sell-off is more forward looking and driven by expectations of policy change and a slowing economy than just technical adjustments. The economy in the US is now slowing and markets are pricing the list of factors in. likely until the end of the year.
As a side note, the US tech sector, especially Facebook and Amazon, has been under pressure with some names down 30 to 40 percent. This is a reflection of slower growth and in some cases, poor management response to scandals. Note that Facebook, Apple, Amazon, Netflix, and Google parent Alphabet are all down 20 percent or more from their 52-week highs – this means that big tech in the US is officially in a bear market. More pain to come.
In the coming weeks, focus on the Fed, the US dollar and the shape of the yield curve.