The major stock market indexes posted strong losses this week, consolidating some of the gains seen this year. The NASDAQ 100 (the laggard for the week) was down 3.1%, the S&P 500 Index fell 2.3%, the Dow Jones Industrial Average fell 1.8%, and the Russell 2000 fell 2.7%. The 10-year Treasury bond yield rose about ½ of a basis point, as Treasury bonds rose for the week. Last week, spot gold also fell somewhat as investors locked in returns, losing 1.6%. Year-to-date, the NASDAQ 100 is still up over 33% and gold is up over 27%, highlighting how well these asset classes have done.
The major story this week is that of market consolidation. Investors are locking in returns from a fairly overbought market. Mega-cap tech stocks have led the market upward from the market bottom in March, going into extreme overbought territory. It’s not a surprise that we’re seeing valuations come back down, even though they remain somewhat high versus historical levels.
Even after this week’s market action—which included losses of over 5% in the NASDAQ 100 on Thursday—it still remains above its 50-day moving average, near overbought levels. We’ve also seen similar action in the S&P 500 (see the following chart).
As further evidence that this is fairly standard profit-taking and normal market action, the segments of the market that fell the most were those that were overbought the most: Technology, Large-Cap and Growth stocks. In the Russell 1000, for example, stocks with the lowest P/E ratio (Value stocks) fell only 1.1%, while those with the highest P/E ratio (Growth stocks) fell more than 6.8% over the last two days of last week. The stocks that gained the most since the market’s bottom in March, also fell the most last week; while those that did not benefit as much fell the least.
Apple lost $235 billion in market cap in two days, Microsoft lost $160 billion, and Amazon lost $148 billion. These are large numbers, but they are small in overall comparison and definitely fall within the realm of profit-taking losses. For example, even after these losses, Apple is still worth over $2 trillion in market cap.
Economic indicators have not recently changed direction. The market continues to add jobs, with the U.S. economy adding back nearly half of the job losses experienced earlier this year. Manufacturing and services also had strong readings for last month as the economy continues to recover.
Also, be on the lookout for the “September Effect” of the market. Historically, September is a difficult month for the market, while the fourth quarter tends to be positive. This effect is very persistent. This effect may be a self-fulfilling prophecy, giving investors an excuse to take some of their money off the table before an anticipated year-end rally.
Given the overbought conditions that still remain in the NASDAQ 100 (its P/E ratio is still as high as it’s been since 2005), the seasonality of the current month, and the general market concerns before an election, it is reasonable to expect some further selling off as part of normal market action.
Flexible Plan strategy update
Our top-performing strategies for the week were those with bond allocations, specially tactical bond allocations. The major exception would be to WP Aggressive, the biggest gainer for the week, up over 4%. All versions of our Tactical Fixed Income strategy also did well for the week, followed up by some of our bond rotational strategies. Roughly half of the strategies that we track outperformed the S&P last week.
Among the Flexible Plan Market Regime indicators, our Growth and Inflation measure continues to show that we remain in a Stagflation economic environment stage (meaning a positive monthly change in the inflation rate and negative monthly GDP reading). We do, however, expect a reversion to a more normal market environment. In the current regime, gold tends to perform the best, followed by bonds, and then equities.
Our Volatility composite (gold, bond, and stock market) shows a High and Rising reading, which favors equity over gold and then bonds (although all have positive returns in this regime stage).
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