As I was sitting here writing how great the market did in November (up 2%!), the Dow is selling off 700 points and making my analysis of the market last month futile. Yesterday was a day of euphoria as the “trade truce” from the G20 Summit over the weekend suggested we could be coming closer to a trade agreement with China. Two things happened since Monday: Robert Lighthizer was appointed to negotiate with Beijing. He has been a China hawk and the market reversed its enthusiasm for a deal to a potential unwinding of what may have been accomplished this weekend. Second, President Trump seemed to reverse course this morning and said that if talks aren’t successful, he is a “tariff man”, which could make matters worse.
Traders seem to be selling and taking a “wait and see” approach as stocks across the board are off. The only sector posting a positive gain is utilities, which have virtually no international exposure.
The US economy continues to be strong, but some economists are suggesting slower economic growth and slower growth for US corporations. The large technology companies (Apple, Amazon, Google, Microsoft etc.) saw about 25% sales growth in 2018 according to Reuters. In 2019 they are expected to grow 17% collectively. It seems to me that expectations were too high, but none of these tech companies is Worldcom or Enron. A selloff in tech presents buying opportunities at attractive levels. Microsoft was trading at 57 times earnings in 2000 during the dot-com bubble. Today it is trading at 25 times forward earnings. Apple trades at 14 times forward earnings while the S&P500 is trading closer to 18x according to JPMorgan.
During today’s selloff interest rates have come down across the board as investors are seeking out the safety of bonds. The yield curve is very flat and close to inversion (where short-term rates are higher than long-term rates). Historically, an inverted yield curve has meant a recession was looming as investors expect long-term rates to decline. I don’t believe that is the case this time for a few reasons. While global trade remains a large wild card, the US economy is growing, unemployment is at extremely low levels and consumer balance sheets are strong.
If you would like to discuss this in further details, please feel free to reach out to any member of the Bernardo Wealth Planning Team.
Bill Roth, CFA
Sources: Reuters, JPMorgan, Wall Street Journal