A Technology/Trade/Interest Rate Sell Off

Led by technology, equities had their worst day since early April broaching key technical levels. According to Bloomberg, the Dow closed below its 200 day average for the first time in 500 days. Will the selling continue as second quarter earnings season quickly approaches?

Some are making the point the current selloff is unique given that profit estimates are rising. Several months ago, I opined the averages could fall even as earnings increase because of a change in monetary policy, specifically stating the impact as to when the yield of the six month treasury exceeds that of the S & P 500. Historically when this occurs, volatility rises. The six-month Treasury is today yielding 2.08% versus a 1.93% yield for the S & P 500.

Most attributed yesterday’s selloff to trade tensions. I too share this view, but also believe changing monetary policy is contributing to recent declines. Interest rates are the largest component of valuation formulas.

I must also write the largest dollar companies have the greatest impact upon the averages. When shares fall, the losses are magnified.

Bloomberg writes the proverbial four FANG stocks outpaced the market by 14 times this year and tumbled 3.8% yesterday, wiping out more than $70 billion in market value. In other words, the stocks that had the greatest performance thus far in 2018, suffered the greatest fall yesterday. Is this a harbinger of things to come?

I must write a $70 billion decline is a rounding error as the four companies mentioned are worth over $2.4 trillion.

What will happen today?

Last night the foreign markets were mixed. London was up 0.57%, Paris was up 0.40% and Frankfurt was up 0.18%. China was down 0.52%, Japan was up 0.02% and Hang Sang was down 0.28%.