Market Flash

Ann Miller |

Quite a day in the markets. 

 

Starting two weeks ago, we have sold several tech-heavy positions in all client portfolios. We have also maintained much higher-than-normal cash levels in all client accounts in anticipation of increased volatility. We believe the portfolio management decision to keep so much “dry powder” in our portfolios will prove beneficial. 

 

We have felt the markets and especially the “Magnificent Seven Tech Stocks” were somewhat overvalued even before the election. Keep in mind the markets have seen record highs in just the last few months and a good flushing of the pipes is not necessarily a bad thing. What we watch for are clues to whether the short-term market is just correcting or whether the integrity of the market dynamic is shifting in a mid / long term way. We are looking at rebalancing alternatives and uses for cash … but … we do not want to be out of position for a rebound. With this in mind, we will need to work through volatility, rebalance and maintain our focus as long-term investors

 

Our view on the major market Indices:

  • The tech-heavy Nasdaq will likely see another 5% to 9% downside.
  • The Dow Jones Industrial Average has reached a support level. While we would like to see it hold here, the next drop could be another 4.5% to 5 %. For perspective that would be in the area of another 2000 points to the downside – which sounds a bit scarier than 5%
  • The S&P 500 may see another 5% to the downside.

Following these types of selloffs, the market can bounce strongly and then may go back down to “test” the previous lows. As mentioned above, we need to work through volatility and maintain our focus as long-term investors.

 

What is driving the markets?

  1. We look for the “Tariff Volatility” to be priced into the market by the end of 2nd quarter. Good or bad is a separate issue. It is the fear of the unknown that drives volatility.
  2. We see the tax bill in congress as an overall positive for the markets. That unknown should have clarity by the end of the 2nd quarter as well. 
  3. Another congressional Continuing Resolution to stave off a government shutdown is an added market driver although historically, these have not caused much economic stress. The timing, however, is compounding the market volatility.
  4. Two huge tech giants started the ball rolling downhill. Nvidia announced a massive earnings beat, an increase to its dividend, and reported a 262% surge in year-over-year revenues and Wall Street is worried they cannot do better going forward. Tesla with the “Elon factor” and reduced government investment in electric cars is pushing Tesla down. NVIDIA will find a bottom and continue to be a market leader – Tesla, not so sure. Wait and see. The rest of big tech is caught in the undercurrent but remain very healthy companies.
  5. Recession signals are starting to flash brighter although the bond market has been waving a red flag for quite a long time now. Plus, the recent weak economic data does not yet reflect the government workers and contractors that may be driving unemployment numbers going forward while recognizing that government job creation has favored employment data in recent years. We do note that markets can still perform well during a recession. Stagflation is a bigger concern but that is a more involved discussion.
  6. We will defer comment on the multitude of other hopefully, (hope is not a strategy but I will use the term just this once), temporary headwinds of market, policy, and political dramas. … We live in interesting times!

Please feel free to call. We appreciate the opportunity to serve you.