It’s been a tough quarter for Technological Stocks (Tech) as they approach year-end. Tech continued to struggle against the triple threat of rising interest rates, global growth fears, and trade tensions between the U.S. and China. On November 20, 2018 the Fear and Greed Index, also known as the VIX index which measures volatility in the S&P 500, is currently being reported at 22.08 from 18.44 on Monday, and that caused the S&P 500 to drop 5.80% to below its 125-day average.
During the last two years, the S&P 500 has typically been above the mentioned average and Tech has been leading the market higher. Therefore, such rapid declines indicate extreme levels of fear driving the market, leading to a bad drop in the overall market. The losses extended on Tuesday, as the S&P 500 stock index turned negative for the year, stoking fears that one of the longest bull markets in history could be at risk.
The stock market’s struggle may seem odd against the backdrop of a strong economic growth, but stocks often act as an early warning system, picking up subtle changes before they appear in the economic data. The technology sector, especially in the U.S., is more exposed to political and monetary risk than a lot of investors were prepared for.
Due to global uncertainties, nervous investors have been dumping shares of U.S. companies for weeks. The sell-off in US stocks picked up steam, with investors dumping Tech that carried the bull market for much of its record run and retailers who were posting disappointing earnings. This slump began with the latest blow coming from renewed concern that demand for Apple’s iPhones has slowed. At the same time, the Trump administration is considering tighter curbs on technology exports that would have a deep and long-lasting adverse impact on relations between the U.S. and China. The selling pressure was again focused in the hard-hit Technology Sector, where shares of the FAANG stocks – Facebook, Apple, Amazon, Netflix and Google parent Alphabet – were under pressure. With this tech wreck, all five stocks are now down more than 20% from their highs in the past year, which puts them in a clear bear-market territory. One of the biggest decliners is Facebook, which has been hounded by data privacy issues, is down nearly 40% from its recent peak, and Netflix, has also fallen almost 37%.
The sell-off doesn’t mean the United States is headed into a recession. The stock market suffered several sharp stumbles in recent years before climbing to new highs on the back of booming corporate profits and strong economic growth.
However, strong economic growth would most likely lead to a prolonged rise in interest rates and rising costs in areas like wages, which would hurt corporate profitability. The market’s losses mount as a long period of low interest rates ends, with the U.S. central bank pushing rates higher in an attempt to take them back to more normal levels. Higher rates result in higher borrowing costs on items such as Houses and Automobiles. Pressure will continue to mount from the Fed, which is widely expected to hike its benchmark rate in December, only to start slowing down its tightening pace in 2019.
Moreover, rapid earnings growth makes stocks attractive. So, when earnings are expected to grow in a decreasing manner, stocks ought to adjust downward. Hence, there is a high probability for the slowdown in earnings to occur. For all of 2018, analysts expected the S&P 500 to report 23.2% earnings growth, but it failed to meet expectations. However, growth is expected to decelerate to 9% in 2019.
Historically, the week before Thanksgiving has offered overwhelmingly positive returns. Since 1993, the week before Thanksgiving saw the Dow Jones end higher 19 out of 24 times. As for the S&P 500, Thanksgiving week has seen the index end higher every time since 2012. Interestingly, it was the best performing week in the second year of the Global Financial Crisis during which the index climbed 10.80% over four days. However, it is doubtful it will continue to move in the same manner for the rest of the year.