There’s really nothing like a little bit of volatility in the stock market to make people sit up and take notice. Whether you’re a seasoned, everyday investor or a relative neophyte putting a couple of hundred dollars each month into a 401(k) account, the last couple of days have prompted just about anybody that is trying to make their money work for them with the stock market wonder what is going on. And it’s true that a drop of more than 5% in all three of the major market sectors in just two days is something you should pay attention to. So what have been the big drivers?
Remarkably, there really isn’t anything new or earth-shattering that has rattled the market. Fed Chairman Jerome Powell seems to have primed the pump with comments he made last week that the central bank is a “long way” from reaching a neutral level of interest rates, since that obviously had the effect of feeding fear that interest rates may be forced to increase more than most have anticipated, or that the Fed may be forced to increase them more quickly than their publicly stated plan has established. Ongoing worries about the trade war between the U.S. and China of course persist, and recent reports of China’s economic slowdown only seem to validate them. When you combine interest rates and trade risk, it seems that you get an increasing preoccupation and concern that the economy may not be able to maintain the strength that has allowed it to extend its latest expansion cycle to unprecedented, even historical lengths. Of course, don’t forget that President Donald Trump is more than happy to add his two cents to the frenzy, as he opined without hesitation Wednesday night on Fox News that the Fed is to blame for the broad market’s recent weakness.
How bad has the damage been? Of the twelve major sectors that make up the U.S. economy, only one, Utilities, has been spared a negative run in the last two days. For the other eleven, the minimum decline is around 3.3%, and the largest is more than 10%. The S&P 500, specifically is down about 3.3%, while the Dow is down about 5.2%, and the NASDAQ is down 5%. The last two days have extended the losses for all three indices, which have retreated since the beginning of October off of fresh new all-time highs. The S&P 500 is down 5.7% and the Dow is down a little over 7%, while the NASDAQ is nearing correction territory, with a 9.5% decline since the beginning of the month. That’s a lot of capital disappearing from the market in a very short period of time – but it could also open the doors to some interesting opportunities if the market can show signs of stabilization and consolidation.
The truth is that despite the market’s extreme reaction, things aren’t really that terrible right now. New economic data seems to suggest that while the economy remains healthy, it may not be as overheated as some investors, and even the Fed seem to fear. The end of the week also kicks off the latest earnings season, with big banks including JPMorgan Chase & Co (JPM), Citigroup Inc. (C) and Wells Fargo & Co (WFC) starting things off. Most analysts are pointing to the expectation that a healthy round of earnings reports could offer investors some relief from the carnage of the last week. It could also open the door to new opportunities to work with stocks in a couple of industries that have been hit the hardest – not just in the last two days, but over the last six weeks or so.
The overall decline in the market, even with that last couple of really bad days, isn’t so large for investors to start talking about corrections or bear markets just yet, but there are several sectors that are nearing the 10% benchmark most analysts use to start talking about corrections, and a couple that have been pushed a little over that point. If, as expected, the latest round of earnings reports shows that corporate America continues to grow profits at a healthy level, the market’s latest volatility could translate to some pretty interesting value-oriented opportunities in two of those sectors in particular.
As measured by the iShares Semiconductor Sector Index Fund (SOXX), this sector has been the worst perform in the stock market for more than a month; as of Thursday’s close, it was down a little over 13%, putting it firmly in correction territory. Trade war concerns have weighed heavily on the sector, as the Trump administration continues to push for intellectual property protections for U.S. tech companies that rely on Chinese factories and production facilities. In the storage space, there is rising concern that supply exceeds demand, on both a consumer and enterprise level, while increasing competition puts even more pressure on profit margins for players like Micron Technology (MU), Intel Corporation (INTC), and Western Digital (WDC), to name just a few.
This is a sector that could remain under pressure for as long as trade tensions persist. The likelihood of an end to the trade war doesn’t seem to be near, and so while there are some very strong fundamental strengths for each of the companies I just listed, with some very compelling value-based arguments over the long-term, downside risk right now appears to be significantly inflated enough to make the smart approach right now to wait patiently for signs of trade compromise, with stabilization of stock prices.
As measured by the Materials Select Sector SPDR ETF (XLB), this sector’s decline isn’t that far off from Semiconductors, at just about 12% since late September. This is a sector that is highly sensitive to commodity prices including energy and oil and even foodstuffs. Concerns that costs have been increasing have been pushing the sector down, and earlier this week one of the sector’s biggest players, PPG Industries (PPG) revealed that it expects to report weak results in both the third and fourth quarters of 2018. This is a sector that includes companies like Freeport-McMoran (FCX), DowDuPont Inc (DWDP), International Paper (IP), and Mosaic (MOS). Interest rates also play a role in this sector’s cyclical nature, as rising rates generally infer increasing inflation, which is a naturally sign of increasing prices, which also means that even the mere notion that the Fed might need to start increasing rates on a faster or longer-than-expected scale would translate to increasing volatility in this sector.
There is, of course opportunity to be had here; many of the stocks I’ve just highlighted offer some very interesting value propositions at their current prices, and the last two days will have simply made those valuations look even more attractive now. A number of them have excellent fundamental strength to boot, which means that the long-term opportunity could be very attractive. That could be even more true if current fears about interest rates can be minimized or shown to be more emotional than factual.
If you’re a value-oriented investor as I am, these are two industries that might of particular interest in the coming weeks and months. They’re already sitting at the bottom of the pile of beaten-down sectors in the market right now, but that fact could also translate to some of the best opportunities moving forward.