foxex: CATCHING OUR BREATH AND PAYING RESPECTS

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. Catching our breath and paying respects

2. Chart of the Day: Financial sector takes a beating

Markets Close

Dow
25,027.07 0.00%

S&P
2,700.06 0.00%

Nasdaq
7,158.43 0.00%

VIX
20.74 0.00%

INV Anxiety Index
99.45 Neutral

US 10-Yr Yield
2.92 0.00%

CATCHING OUR BREATH AND PAYING RESPECTS

U.S. Markets were closed today as the nation paid final respects to President George H.W. Bush, who passed away on Saturday.

Respect.

We are still digesting the intense selloff from Tuesday, which erased the gains from last week and Monday's "tariff treaty", rally. Where we go from here is anyone's guess, and anyone who tells us they know is guessing. These are the things we do know:

Market Volatility has been intense over the past several months. The S&P 500 has dropped at least 3 percent on 5 days so far in 2018. In 2017, the S&P 500 fell just 2.8 percent from peak to trough the entire year. 2017 was a quiet year that slowly churned upwards.
The S&P 500 is down 3 percent in December. That's only happened in 1987, 2000, and 2008. Those were bad years for stocks - very bad. But, oddly enough, the S&P 500 closed higher for the month every one of those years. Markets are unpredictable.
We are living in a world of large numbers. The DJIA is around 25,000. Tuesday's decline of more than 3 percent knocked 800 points off of the Index, but it wasn't the biggest decline of the year, so far. Remember, the DJIA fell 1041 points back on February 8th, knocking more than 4 percent off of the Index. It then proceeded to eclipse multiple records until it hit turbulence at the end of August. Big declines are scary, yes, but we should put them in perspective.

Why it Matters:

Perspective is everything in investing, it's just hard to have it when the charts are red and our portfolios are shrinking. But, as we keep saying, investors need to be able to stomach the downturns if they want to share in the gains. The chart below, which has been shared abundantly over the last few days, is a good reminder of that.

What's Next:

We are back in business Thursday in the U.S., but international markets were open for business today. They all closed lower, from Frankfurt to Tokyo. The "tariff ceasefire", is still a mystery and will remain that way until we have definitive signs that Beijing and Washington are on the same page, and that a resolution is in the works. The WSJ reports that China has a timetable in mind for the negotiation process. Does the U.S.?

The inverted yield curve, however, remains a problem. We wrote about it extensively, yesterday, but if you missed it, James's technical explanation of what happened and what it means is very helpful.

Bonds signaling inverted yield curve and potential recession

We are not predicting a recession, although a lot of people are. The tricky thing about a recession is if you are in one it's hard to tell right away. The classical definition of a recession is at least two consecutive quarters of negative growth. At last check, the U.S. economy grew at a 3.4 percent rate in the third quarter, according to the Commerce Dept. That was down from 4.1 percent the prior quarter, but still pretty strong. Recessions don't happen all of a sudden, and those predicting the next one see it coming in late 2019 or 2020. It's also important to note that recessions don't cause bear markets, either. They can and do walk side by side for periods of time, but never forget that the economy and the stock market are not the same.

In other news...

Investors rush to cash as market risks escalate

That doesn't mean you have to, but if you haven't rebalanced yet, consider it strongly.

U.K. regulators release emails from Facebook considering selling personal data (WSJ)

This is not going to go over well in Europe, where they take this much more seriously than we do on this side of the pond (though we probably should, as well). Expect mighty fines, if not more punishment.

CBS may not have to pay former CEO Les Moonves $120 million, but shareholders could face bigger problems (NYT)

The NYT has done some extraordinary reporting on the Moonves scandal that, if true, demonstrates a lack of corporate governance and plain common decency at one of America's legacy broadcasters.

Mike Bloomberg says he'd sell his company if he runs for president (RadioIowa)

This is not an investing story, per se...but Mike Bloomberg changed the game in financial information technology, changed New York City as Mayor, and has the money to make a real run at the White House. Who would buy Bloomberg? Any company that wants a multi billion dollar a year business that is firmly entrenched across financial institutions around the world. This could get interesting.

James has the goods on the extreme selloff in the financial sector, below. The financials are the proverbial canary in the coal mine when it comes to economic growth. It's worth a read.

Chart of the Day: Financial sector takes a beating

From scandal-plagued Goldman Sachs (GS) and Deutsche Bank (DB) to banking behemoths like Citigroup (C), Bank of America (BAC), Wells Fargo (WFC) and J.P. Morgan Chase (JPM), the financial services sector has not been doing well this year, particularly since September. This can all be seen clearly in the popular financial sector ETF known as XLF (Financial Select Sector SPDR Fund).

Expectations of rising interest rates have declined due to an apparently dovish-turning Fed, and banks that generally benefit from higher interest rate environments have taken a hit. Of course, the poor performance of the financial sector is not all due to tamer interest rate expectations. As mentioned, giants like Goldman-Sachs and Deutsche Bank have been hit by separate scandals involving governments and international law enforcement.

Year-to-date, the XLF ETF is down around 7% and well below its 200-day moving average. It's bad, but not horrible, considering that Deutsche Bank is -52% YTD, Goldman -27%, Citigroup -16%, and Wells Fargo -14%. But that's usually how it works with ETFs vs stocks. Although XLF is concentrated on only one sector, its holdings are obviously much more diversified and less exposed to unsystematic risk than individual stocks.

Despite this blunted risk, the financial sector is clearly underperforming, and currently stands as one of the worst performers year-to-date, aside from energy, industrials, and materials. With interest rate increases expected to slow going into 2019, investors might want to be even more cautious than usual about investing in this sector.