There was a significant sell off that shook equity markets during today’s trading session. S&P 500 closed down 95 points (-3.29%), the Dow closed down 830 points (-3.15%), and the NASDAQ 100 closed down 315 points (-4.08%) with the bulk of the losses being posted towards the end of the session. The question remains, what is to come? Futures markets on the S&P, Dow, and NASDAQ continued to slide after the equity markets closed implying a further slide of about 1% in each index for tomorrow’s open.
The equity markets as a whole haven’t posted losses like this since the end of January and have consistently retraced its steps back towards all-time highs bolstered from earnings growth, strong consumer sentiment, tax windfalls from the 2018 overhaul, strong GDP growth, and a red hot job market. All of this was with the headwinds from rising treasury yields, global trade spats (most notable of which with China), and the tightening of interest rates from the Federal Reserve.
So what changed? Did all of what supported the market to all-time highs at the end of last month go out the window? As history tells us, equity markets have a tendency to sustain slow and steady, drawn out gains, to just quickly give all of that back with little notice. The S&P 500 blew through strong technical and fundamental resistance points. The fundamental levels were at 2850 and 2800 which represent strong resistance points for projected earnings for the rest of the year. On a fundamental basis, we can agree that day-to-day not a lot changes, but herd mentality rules all. If some big players exit the game, pulling capital out of the financial markets altogether, many will follow suit.
The question remains what drove these large players to lead the charge out of equities and not transfer capital to the so-called safe haven of bonds? Chatter points towards strong concerns over the upcoming Q3 reporting season from the bulk majority of S&P 500 companies. Investors have been given a reason to believe that a hit to earnings growth is on the horizon and is finally being realized from an adverse trade environment. To date, equities have sustained solid earnings growth, but additional input costs, export/import expenses, more expensive lending, and stricter tariff enforcement has concerned some deep pockets.
To further worsen the prospective environment, there is speculation (and I emphasize speculation) that if the trade war with China continues to thicken, the country could take drastic measures against the US and begin dumping our debt back into domestic markets, which would cause interest rates to soar from excessive supply of bonds. The rising rates will draw investors out of equities due to the greater appeal of a return on investment continuing to drive the equity markets down.
To be honest, up until today we were still bullish. We felt a number of bearish players who were screaming from the rooftops had already expressed their opinions in the marketplace (via selling, taking gains, reducing positions, etc.) and the strong technical and fundamental levels in the overall market would hold. Today has us questioning that and we hesitate to lean long in this environment. Our (insignificant) opinion is a neutral/sideline stance waiting for Q3 earnings season to play out.
“Markets are never wrong – opinions often are.” – Jesse Livermore.