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Is this sell off a correction or the start of something big?

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The big stock market question whether the current stock market sell off is a correction and buying opportunity, or the start of a market crash, has been resuscitated overnight, with the Dow Jones index down over 500 points with a couple of hours left to trade (when I jumped out of bed).

This follows a nice rebound in stocks after the midterm election result, which didn’t surprise key market influencers on Wall Street but wasn’t exactly what the Street wanted. A win to the Republicans in both the House and the Senate would have augured well for US economic growth but it was always going to be a big ask, given the voter interest by anti-Trump forces.

With the election out of the way, what negatives could be behind today’s negativity?

The trigger for the sell off was bad news for Apple and it has continued the questioning about the share prices of other big tech names. And this piles on top of other concerns, which I’ll list, for brevity purposes. Here we go:

• The US dollar is creeping higher.

• Global economic growth is stuttering, with the EU and China not as robust as expected, say, six months ago.

• The US-China trade war is still out there and what Donald does next is anyone’s guess. And it’s not pro-stock prices.

• The US economy is robust so concerns that the Fed will raise interest rates too quickly represent another nagging doubt for investors.

• The oil price is falling and US stocks don’t like this development.

As you can see, there are lots of reasons why the stock market is fighting to beat gravity. Throw into the mix that a key supplier to Apple — Lumentum — cut its outlook for next year, which instantly raised doubts about the demand its getting from the late Steve Jobs’s ‘baby’.

Apple

Source: finance.yahoo.com

Six weeks ago, Apple was a $US232 stock. It has lost 16% since October 2 and if it loses another 4%, it will be in bear market territory. But to put Apple into context, since May 2016, it’s up nearly 100%, so a 16% pullback might be overdue. And let’s face it, this China trade war wouldn’t be the ideal setting for a company that sells about $18 billion worth of products into China per quarter!

In July, the Washington Examiner looked at the effect of the Trump trade war on Apple’s sales. “Revenue from the world's second-largest economy grew 19 percent to $9.55 billion, the Cupertino, Calif.-based company said in a statement,” it reported. “The numbers show Trump's 25 percent tariffs on $34 billion of Chinese imports and President Xi Jinping's retaliation have yet to dint Apple's performance.”

However, economies work with lags, so market junkies are wondering if the trade war is creating a casualty out of Apple.

This Apple problem underlines what has happened to the famous FAANG stocks, which include Facebook, Apple, Amazon, Netflix and Google (Alphabet), whose share prices have been growing faster than was rationally believable.

To explain why US stocks are so negative (apart from the list of big economic issues), the tech stocks have had a reality check. They’re still good companies but their values were just too elevated. “The FANG trade is dead and the market is struggling to find a replacement,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group in the US. (CNBC)

Meanwhile Goldman Sachs fell 7% after a stoush with the Malaysian Finance Minister, who demanded a return of fees paid for what was seen as bad advice to a publicly-owned investment fund.

To throw fuel on a stock market fire, news out says President Trump is looking at slapping a 25% tariff on cars made outside the USA. His thinking is that the strongarm tactics worked on Canada’s Justin Trudeau, so he might double up on global carmakers who sell imported vehicles into the States.

All this runs ahead of a meeting between the US President and China’s Xi Jinping in Argentina on November 30. That means we could have 17 days of Donald Trump playing ducks and drakes with markets, countries and the whole world. And it explains why stock markets (that hate uncertainty) are struggling in 2018. We’re down about 2% year-to-date, while the USA’s S&P500 index is up only 2%, so we need some good news sooner rather than later, or else that usual Santa Claus rally we see in December might be kissed goodbye.

It will be Donald who’ll be doing the kissing and that’s an image I’d rather do without!

I still think we’re looking at a correction not a crash but one silly, impetuous, false move by the US President and a buying opportunity for stocks could turn into a selling imperative.

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Published: Tuesday, November 13, 2018


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