The end of the bull?

The stock market sell-off in the latter part of last week accelerated overnight. A collapse in Japan’s Nikkei contributed to steep falls across all US stock index futures. Once again, the tech sector is leading the way down, just as it led the march up. But there is no evidence that investors are rotating out of tech and into US mid-caps anymore. This morning both the NASDAQ 100 and Russell 2000 had lost around 4% in early trade, with the Dow and S&P 500 following closely behind. This is clearly a ‘risk-off’ move across equities. But investors are also cutting their exposure to such ‘safe havens’ as precious metals, as gold and silver are down sharply, as is oil. The main beneficiary in all this is the bond market. Yields have slumped over the last few trading sessions as investors price in the prospect of sharply lower interest rates, as recent data weakness has boosted recession fears. There’s also the ‘flight-to-quality’ aspect, where funds coming out of equities are parked in bills, notes and bonds until investors get some clarity over how much more stock market downside there may be. The yield on the key 10-year Treasury Note has dropped to 3.74% this morning, its lowest level since July last year. There have been a combination of factors triggering the moves. There have been some disappointing Q2 earnings reports, particularly from amongst the ‘Magnificent Seven’, while recent economic data releases suggest an economy that is slowing rapidly. Despite a strong Q2 GDP report, which is backward-looking anyway, last week brought poor manufacturing, labour and construction numbers, topped by Friday’s weaker than expected payroll update. This big ‘derisking’ also coincides with the move into peak summer. At some stage, buyers will come back in to take advantage of ‘knock-down’ prices. But there’s no sign that the major indices have stabilised yet. The bigger question is whether this bloodletting will prove sufficient to provide a basis for a resumption of the stock market rally, and ultimately fresh record highs. The alternative is that the top is in, and investors will have to adapt their outlook, and strategies, accordingly.

muggins

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muggins