Early last week the stock market began to stabilize on some positive news about the US/China trade dispute. It actually gained 2% from 12/10/18 through 12/12/18. However, that rally stalled and we saw a big selloff on Friday 12/14/18. Today, the market tried to rally but again failed to hold early gains and saw steep declines by the end of the day.
In my opinion, this recent weakness is being driven primarily by computer driven trading programs. These programs are tied to key technical levels on stock market indexes (such as S&P 500). Once a technical level is breached, these programs kick into sell mode, which just pushes the market down further. These programs completely ignore fundamental factors (such as corporate profits, economic growth, cash available, etc.).
Fundamentals remain positive, if not strong, both in the economy and the financial markets. Trade tensions and the Federal Reserve raising interest rates remain the 2 biggest risks to the fundamentals. However, the financial markets appear to be anticipating a very negative outcome on both risks. While I don’t see that happening, the stock market has a mind of its own.
The next couple of days will be critical. The Federal Reserve meets 12/18 – 12/19. The US Government faces a partial shutdown on 12/21 unless the President and Congress can agree on a spending deal. The S&P 500 is dangerously close to the lowest level for the year (2,532 set on 2/9/18). The stock market is extremely oversold and due for a corrective bounce.
I have been adjusting portfolios since mid-October by rebalancing into safer investments and cash. I will continue that process as the situation evolves.
Please call us with any questions or concerns.
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