foxex: The Pain Trade

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. U.S. markets sell off as near-term trade deal prospects fade
2. Trump launches new tariffs on European delicacies

3. Google's founders step down
4. Twitter heads to the bond market

5. Volatility returns after a two month break

Markets Closed

Dow
27,502.81 -1.01%

S&P
3,093.20 -0.66%

Nasdaq
8,520.64 -0.55%

VIX
15.96 +7.04%

Bitcoin
$7,350.80 0.32%

US 10-Yr Yield
1.709 -6.92%

credit: WWE

Markets Today

U.S. markets faced a steep sell-off today as investors awoke to the news that President Trump said a trade deal with China may not happen until, "after the 2020 election." At their lows, the DJIA, Nasdaq, and S&P 500 all declined by more than 1.6% each, but recovered by the close to end the day with modest losses. Around noon there was news that the White House planned to push ahead with 15% tariffs on around $160 billion worth of Chinese goods on December 15th. Those tariffs would hit consumer electronics and components, many of which have been heretofore exempt from increased duties. Still, it was the third day in a row of losses for U.S. markets which had just come off record-breaking highs in the past couple of weeks. The yield on the 10-year Treasury bond, which moves inversely to price, dropped by 6.9% to around 1.71%, its biggest decline in four months.

Investor sentiment is being driven by the news cycle, and the trail is bumpy right now.

Headlines

The Trump administration has proposed additional duties of up to 100% on French exports like champagne, cheese, makeup, and handbags worth $2.4 billion. This is in retaliation to the European nation's "unreasonable or discriminatory" Digital Services Tax.
Chinese state-run media has said the government is rushing to release its "unreliable entity list" since the passing of a bill in Congress related to China's treatment of the Uyghurs, a predominantly Muslim Turkic ethnic group, appears imminent. The list will include U.S. companies that pose a risk to China's national interest.
Google founders Larry Page and Sergey Brin announced today they are stepping down from their roles as CEO and President of Alphabet (Google's parent company) effective immediately. They have turned over the stewardship of Google and Alphabet (GOOGL) entirely to Sundar Pichai, Alphabet's new CEO, who has been CEO of Google since 2015.
The Indian government is looking for a buyer for its debt-ridden national carrier Air India, and is reportedly considering changing a rule that prevents foreign control of local airlines. (Bloomberg)
EU leaders will commit to cutting net greenhouse-gas emissions to zero by 2050 when they convene at a summit in Brussels, according to a draft of their joint statement for the Dec. 12-13 meeting. To meet this target, the EU will promise more green investment and adjust all of its policy making accordingly. (Bloomberg)
Twitter is planning to offer its first-ever unsecured bonds, aiming to raise $600 million as it tries to bounce back from disappointing quarterly results. As of Sept. 30, the company had around $5.8 billion of cash and short-term investments, meaning it should have considerably more cash than debt, even after issuing the new bonds. (Source WSJ)

Why this is Not a 2018 Repeat

It's easy to look at the recent selloff and start comparing it to what happened at the end of last year. As you may remember (or maybe you have chosen to forget) U.S. markets spun into a dizzying correction on concerns that the Federal Reserve's interest rate hikes would propel the U.S. economy into a recession. Markets bottomed on Christmas Eve, but then recovered as the Fed reversed course and Fed Chair Jay Powell promised to be patient and accommodative.

You know what happened next... and here we are, up about 30% from the lows of 2018. We made up the chart above for illustrative purposes, but the point we want to make is that the U.S. stock market and its investors are in a very different place today than a year ago. That doesn't mean the market won't correct again - it will, but we just don't know when. The underlying factors driving investor sentiment are very different today than a year ago.

Namely:

The Federal funds rate is 0.75% lower today than it was a year ago. It's not going higher anytime soon, according to the Fed. It's near historic lows, which reduces borrowing costs and drives investors into stocks in search of yield.
Fears of a recession have faded as economic growth has stabilized around 2%, and should head higher if and when a trade deal with China is announced.
Corporate profits are growing slower than they were at this point last year, but they are still growing, and markets are near all-time highs. Investors have accepted and embraced slower growth as long as stocks return more than other asset classes.
The trade war is a political football. Three weeks ago the U.S. and China were "very close to a deal", according to the Trump administration. Today, we could be a year or more away. If you bought or sold every time there was a head fake on the trade negotiations, you would not have ridden the 25% gains we have experienced this year.

chart courtesy YCHARTS

Volatility Returns

The last few days have awoken the volatility Death Eaters from their slumber, however. After napping for most of the year, the VIX, or Volatility Index, is up 51% in just the last four days. It's nowhere near the dizzying heights of last December, or even July or October of this year, but it has been climbing as hopes of a near-term trade agreement with China have faded. Trade has been the fulcrum of the market all year, so the recent rise should come as no surprise.

Traders love volatility because it gives them opportunities to trade in and out of stocks quickly and earn quick profits. For individual investors, volatility is noisy and sometimes a little scary, but should not deter us from our long term strategies.

More News:

4 Big Name Stocks To Weigh Selling Now Before Losses Widen

The Five Best 529 Plans for College Savings

Is It Too Late To Buy Nike Stock?

chart courtesy YCHARTS

No substantial gainers today with no S&P 500 stocks gaining more than 2.5%. A number of real estate investment trusts rose slightly to beat the overall slump. Gainers included Crown Castle International, SL Green Realty, Healthpeak Properties, Extra Space Storage, and Public Storage which rose 2.4%, 1.8%, 1.7%, 1.5%, and 1.4% respectively.

Oil exploration and production company Apache fell 5.9% after it was silent as to whether its new well was commercially viable, leaving investors worried. This continued on from yesterday's 12.3% drop. It was also a bad day for fellow energy companies Cimarex Energy and National Oilwell Varco which fell 4.6% and 4.0% respectively.

Word of the Day
Political Risk
Political risk is the risk an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policymakers or military control.

Gregory Smith / Getty Images

Today in History

December 3, 1901

Today in 1901 President Theodore Roosevelt gave his first state-of-the union speech, wherein he said that "combination and concentration" should be "within reasonable limits controlled." Despite the passage of the Sherman Anti-Trust Act of 1890 a decade earlier, little had been done to police monopolies in U.S. business. Roosevelt acted on this declaration the next year when he urged his Justice Department to dismantle the railroad monopoly, "The Northern Securities Corporation." This action caused a supreme court case that was ultimately decided in 1904 when the chief Justices ruled 5 to 4 that the corporation had violated the anti-trust act.

Sources: http://www.let.rug.nl/usa/presidents/theodore-roosevelt/state-of-the-union-1901.php

https://www.theodorerooseveltcenter.org/Learn-About-TR/TR-Encyclopedia/Capitalism-and-Labor/The-Sherman-Act.aspx