Equity markets opened sharply to the downside this morning. U.S. stock futures on the gray-ish Globex market had been trading higher during Wednesday’s national day of remembrance–as might be expected after a decline as sharp as Tuesday’s more than 3% decline–but that all changed when the benchmark CME futures re-opened for trading at 8pm last night.
The move downward in stock futures was catalyzed by the arrest yesterday of Huawei’s CFO, Meng Wanzhou, in Vancouver on the request of U.S authorities. Any good feelings from the Trump-Xi meeting in Argentina over the weekend have been obliterated and we are back to full-on trade war status. It remains to be seen whether Ms. Meng will be extradited, but she is the daughter of Huawei’s founder, Ren Zhengfei, clearly one of the most powerful men in China. Spats over tariffs are one thing, but when foreign nationals are being incarcerated it takes the trade war to an entirely different level.
Also, as of this writing, the U.S Treasury yield curve remains inverted in the 2-year (2.73%) to 5-year (2.72%) range and the flight to safety in the 10-year (2.87%)–an expected event when equity markets crater–means the all important 2-10 spread is very, very close to inverting. I explained in my Forbes column Tuesday the deleterious effects of an inverted yield curve, especially for stocks.
So, now you need to be careful. Not just with your money, but with whom you are choosing to advise you on the investment of that money. Avoid those advising you–either in person or in the media–to put your money in so-called safe haven stocks.
There are no safe haven stocks in a broad based market sell-off. That is what broad-based means.
Do not be myopic; overseas equity markets have pulled back strongly this year and the idea that the U.S. is some kind of island of safety in an economically volatile world is patently ridiculous. That may be true for U.S. bonds, but as U.S. bond prices rise that beings the yield curve closer to inversion, hurts the all important financial sector (I also explained this in my Forbes column Tuesday) and makes the Federal Reserve’s job that much tougher at its meeting on December 18th and 19th.
So, that suggests the easiest solution to worries about a decline in the value of your stock portfolio: sell stocks. The market’s focus in the so-called FAANG stocks has caused an size effect wherein ETFs buy more and more of those names simply because they are larger. As they sell-off the carnage that had already been occurring in important non-tech sectors of the market becomes apparent.
If you have a strong stomach look at the charts of Goldman Sachs, Wells Fargo and ExxonMobil and Caterpillar. These are not among the stocks of companies that I consider permanently damaged and from which I have repeatedly warned Forbes reader away–Kraft Heinz, Ford, IBM, GE, etc. No, these are companies that are being punished by the market owing to factors outside their management’s control.
Also, companies like Apple and Boeing–I would consider both among the best-run companies in the world–have profits that are very exposed to the Chinese market. Trade war concerns have pressured those stocks in the past three months. If tensions continue I would not be surprised to see Apple in the $150s and Boeing in the $290s, levels that would have been unthinkable as recently as August.
That’s the scary thing about market sell-offs. The good gets thrown out with the bad. Remember also that we are only 16 trading days from year-end. Tax-loss selling is a powerful force for individual investors looking to harvest capital losses to shield gains elsewhere.
Tomorrow’s November non-farm payrolls report had better contain benign figures on inflation, or this rout will continue. This move in the market has been caused by rising interest rates, and though that trend has reversed in the past month–thereby spooking the stock market even more–it does offer the solution to your portfolio problem.
The 2.73% yield on the 2-year Treasury should be considered risk-free. I believe that return will outperform the return from equities–which obviously carry the risk of capital losses–over the next 12 months.
So, that’s what you should be doing today. Sell stocks and buy bonds. Enjoy the holidays and forget the Fed.