What has Caused the Recent Market Decline and Where Could it Head?

Recently, the Dow Jones, S&P 500, and NASDAQ all lost their YTD gains. Primarily, these losses have been compounded by the nearly 20% dip in U.S. crude oil and low growth concerns in the technology sector, particularly in big name companies such as Apple. However, there is another factor that has played as critical a role in these markets: the government.

U.S. markets have experienced unparalleled growth during the Trump presidency when compared to their global counterparts. Personally, I believe the reasoning for this rise lies in Trump’s deregulated mindset. Furthermore, I believe that what raises the the status of U.S. markets from that of “growth” to “hyper-growth” is the extent to which Trump deregulates. One popular example is Trump reshaping America’s role within the Trans-Pacific trade deal known as NAFTA, now renamed as the USMCA. However, one policy matter that is currently playing a major role is Trump’s trade relations with China.

Trump has planned to put a tariff of either 10% or 25% on at least $200 billion worth of Chinese goods. The initial proposal was made earlier this year, but throughout the year, Trump has strengthened his position on the matter and each time he has done so, U.S. markets have generally risen. For instance, on November 26th, he hinted at potential tariffs on Chinese made iPhones, which helped propel the Dow Jones to soar over 300 points. Consequently, Apple’s stock has fell nearly 2% in the Monday after-hours.

That said, I believe that the current market decline from October’s end is due to heavy liquidation and price refactoring. American markets have risen so much over the past two years when compared to the rest of the world, and the basis of that growth, although correlated with Trump’s deregulated mindset, has primarily been a combination of unparalleled corporate growth and domestic consumer confidence. With declining earnings and slower growth in market-heavy sectors such as technology and oil, investors alike are liquidating funds to the point where the whole market sells off as a result.

However, this slower growth should not be mistaken as an impending recession. Since U.S. markets have been as such inflated growth levels, this recent dip is actually helpful in that it eases the growth levels from “sky-high” to “moderate”.

In terms of price refactoring, I believe the markets are finally taking into account certain companies’ inflated fiscal health, such as NVIDIA and Tesla, as well as the global impact Trump’s policies have, not just the domestic impact.

This combination between investor liquidation and market price refactoring has created a perfect storm on the U.S. markets.

There is also plausible concern as to the potential of a bear market. The U.S. treasury is going to issue more than $1.3 trillion in bonds this year compared to last year’s issuance of $546 billion in bonds. This raises concerns as to the quality of U.S. debt, an issue that has crippled/limited growth since the Great Recession.

Furthermore, there are extremely similar charts in the S&P 500 from the 2011 to the present and between 1993-2002, the period of the dot com bust. These charts use an indicator developed by Paulson Investment Company called a “Popular-to-Panned” ratio. This ratio measures the performance of new and high yield technology stocks to tech stocks with slow or “lagging” growth. The chart below from March shows the two time periods, and currently, the two patterns have paired very similarly, with the current P/P ratio of the 2011-current S&P 500 displaying similar declines to the 1993-2002 S&P 500, both in magnitude and timing.

Overall, my recommendation would be to try to hold as much cash as possible. I believe there is too much volatility given the current market conditions to hold through the coming winter. I would wait for more stability between the Trump-China trade relations and I would look for quarter-over-quarter growth within the technology and oil sectors before considering investing/reinvesting in the market.

Please read my disclaimer before taking any financial action.