The S&P 500® Index is down approximately 3% on the week and approximately 9.5% from its peak on September 20, essentially wiping out gains for the year. But the selloff is concentrated in a few mega-cap tech companies.
The overall NASDAQ 100 is down approximately 13% since September 20. But take a look at some of the biggest winners over the last few years and their approximate numbers today, relative to September 20:
- Facebook down 20%
- Amazon down 21%
- Apple down 18%
- Netflix down 25%
- Alphabet (Google) down 13%
In our view, this is more about idiosyncratic, company-level problems than it is indicative of systemic risks in the U.S. economy. For example, Apple is reportedly cutting production orders for its newest iPhone—this against a backdrop of what we believe is a healthy global consumer.1 Trade policy also continues to be a watchpoint for tech, especially going into the G20 meeting in Argentina at the end of the month.
Keep in mind that these tech companies may be more exposed to shifts in international demand and to shifts in supply chains than other sectors. While global demand has slowed this year, the weakness in Europe and Japan seems to be driven by transitory factors. We expect a stabilization or even a rebound in those geographies in the months ahead.
The macro view: It’s late in the cycle but not the end of the cycle
Is this the beginning of a recession? We don’t think so, and here’s why:
- The U.S. Federal Reserve (the Fed) is talking about the need to take monetary policy into restrictive territory, but rates are not restrictive yet.
- The yield curve on U.S. Treasuries has flattened considerably, but it has not inverted yet.
- The third quarter earnings season, in the aggregate, was outstanding, with earnings growth of around 26%.2
Based on those and other considerations, recession risks still look more elevated to us in 2020. By then, the yield curve is likely to have inverted, the Fed is likely to have taken the punch bowl away, and fiscal stimulus—which has driven a lot of the economic and earnings strength in recent quarters—will have faded.
In our own multi-asset portfolios, late-cycle risks and expensive valuations mean we are operating more as risk managers than as risk takers. But we are not at a maximum defensive posture—yet. And the fact that those concentrated big winners in the U.S. have now become big losers—well, that points to the importance of a prudent approach. It’s the wrong time to concentrate bets. We think the most prudent approach is a globally diversified, multi-asset strategy. Because markets aren’t likely to get less volatile any time soon.
2 Source: https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_111618.pdf. As of Nov. 16, 2018.