The tech sell-off persisted for the second week in a row teaching new investors the crude lesson that, yes, stocks go down too. The market sell-off that was set off by plummeting shares in technology stocks on Thursday, 9/3, had extended 3 days ending Tuesday, 9/8, following Labor Day. While the sell-off didn’t lead to a technical correction (decline of at least 10% from recent highs) for 2 of the broader equity indices (S&P 500 and the Dow), it did for the tech-heavy Nasdaq.
The sentiment now is that very few investors see the latest sell-off leading to a March repeat. For the most part, it’s being viewed as a healthy step back from the overflow into the FOMO (fear of missing out) trades that’s contributed to the robust rally in equity markets. With too many unknown variables at play, such as the upcoming presidential election, COVID-19, and the congressional deadlock for the next stimulus package, the coming year is likely to be plagued with further market volatility. And for the most part, people seem to be aware of this. It’s probably why we saw the recovery on Wednesday, with investors capitalizing on the dip, but the following day returned those gains when investors weighed those unknown variables. By the way, the technology sector was at the front of the line again handing over those gains Thursday. This just further strengthens the thesis behind diversification being the only free lunch in investing, and how important it is to limit exposure to any one specific sector.
Still, even with all the uncertainty in 2020, the economic numbers are showing some signs of improvement, albeit at a slower pace. Jobless claims came in below one million for the second straight week with the number of Americans filing for unemployment benefits unchanged from the prior week’s numbers. Although, the more surprising number came from Friday’s release of CPI (consumer price index).
The annual rate of inflation, otherwise known as CPI, increased 1.3% in the month of August exceeding July’s 1% and market forecasts of 1.2%. This marks the third consecutive increase in inflation since May. Demand for goods continuing to trend upward from the beginning of the pandemic shows the resiliency in the consumer. The largest contributor for the increase in prices in August was the increase in demand for used cars (which increased immensely to 4%, compared to -0.9% in July). Sales of used cars and trucks increased primarily due to the limited supply of new vehicles attributed by auto factory closures in the spring. This goes to show that many consumers are still comfortable enough making large financial commitments, like purchasing a vehicle. Although, with talks for a second federal aid package being stalled, concerns are quickly increasing since consumer spending habits could be taking a hit soon.
What the 1.3% can also tell us is that inflationary pressures are not as high since it’s still under the Fed’s average target for inflation of 2%. Of course, with the Fed’s new changes to its inflation targeting mandate (letting ride above and below the 2% target), it won’t be looking to preemptively affect inflation anytime soon by hiking rates.
One minute there’s a sharp sell-off across equity markets, and in many cases a reasonable assumption would point to weakness in the broader economy, but then you have economic indicators “indicating” improvement. With all the conflicting signals and noise out there, it’s difficult to determine what news is investable news. However, we continue to closely monitor our watchlist for any wide-moat companies that reach attractive discounts. As always, please don’t hesitate to reach out to your wealth manager with any questions you may have about your financial plan.
Stay safe everyone!
– Matt Kawashima