Yesterday the S&P500 lost 3.29% in a market selloff that got worse as the trading day went on. It was the third biggest drop in stocks this year, as the index endured a 4.1% drop on February 5th and a 3.74% on February 8th. While the selling looks to be done at least for now, taking a step back and understanding how we got here is always our first step. There wasn’t one single factor that caused the indiscriminate selling but perhaps a few:
Stocks outside of the US have had a rough time this year as we continue to note in our monthly commentaries. Global growth is slowing, bond yields are rising and the trade tension between the U.S. and China don’t seem to be progressing favorably. The Chinese stock market has lost around 15% while domestic stocks seemed to have ignored it up until now. Investors may be pricing in the probability of a trade war.
Last week Fed Chairman Powell said, “We may go past neutral, but we’re a long way from neutral at this point, probably”. This spooked the bond market and interest rates increased as investors took this to mean that more rate hikes are coming. Higher rates increase financial costs for businesses, which is most likely why small-cap stocks have been hit the hardest during this selloff.
When we look at what sold off the worst yesterday, growth and momentum stocks (specifically technology) were seeing valuations continually stretched. Momentum stocks (as a factor) led the market down yesterday, dropping around 4.5%. Technology lost 4.77%. On the flip side value stocks, which have struggled this year against growth, held up relatively well. The Russell 1000 Value was down 2.54% and seems to be gaining interest as value stocks look historically cheap compared to growth. Many of the companies on the value side of the market pay dividends and have strong balance sheets so they can withstand a selloff in the markets but look boring when growth is in vogue.
Having a broadly diversified portfolio sometimes means underperformance against a factor or sector that seems to go straight up, but history shows that corrections usually break up the excess and do so rather quickly. Fortunately, corrections come and go. The US economy is still in good shape, interest rates are still historically low and accommodative, and there are areas of the market that still look attractive.
If you have any questions, please feel free to reach out to any member of the Bernardo Wealth Planning Team.