It is hard to believe that this month marked the anniversary of the market bottom of the financial crisis that is now a decade behind us. On March 9th of 2009, the Dow traded at a low of 6547.05 and the S&P 500 hit a low of 676.53. Both were down 53.78% and 56.78% respectively from the high set on October 9, 2007. What was supposed to be a problem in the subprime mortgage market, eventually became the worst financial crisis of our generation. Unfortunately for those of us in the markets at that time, we had no idea that not only was the bottom in, but we were entering what has now become the second longest bull market on record. Like the recent high set back in January of this year, markets have a way of doing what is highly unpredictable. During the financial crisis, it felt as if stocks were in an uninterrupted path down and in January of this year it felt as if there was no news that could derail the steady climb higher.
The selling that started in mid-January and into February continued this past month, driving all three major indices lower and sending the Dow and S&P into negative territory for the year. The Dow’s retreat was the largest, declining 3.7% for the month and now down 2.49% for the year. Although the NASDAQ gave back 2.88% for the month, it closed in positive territory for the year up just 2.32%. Bond yields, which seemed to be on a steady march higher, had closed at 2.738%, down 4.25% on the month. This sent fears that higher rates would become problematic for the market and the economy. Sticking with a long-term plan is typically harder to do when the market isn’t going straight up, but this changing environment is ironically healthier for keeping the bull market alive.
To understand some of what has been happening over the last month, we can answer this question for some clues: What do Mark Zuckerberg and President Trump have in common? One, is that each have contributed in some way to the recent selloff. Protection of privacy and the likelihood of government regulation of big technology companies has spooked tech investors. Revelations of the misuse of data collected by Facebook sparked selling by investors not only in Facebook but in the broader technology and social media sector. The other headline dominating the markets during the month was more upheaval in the White House and the announcement by President Trump of tariffs on China. This news sparked fears of a trade war, igniting volatility into the markets yet again this month. After the lack of any volatility throughout 2017, investors are having difficulty adjusting to the sharp swings which have dominated the market trends since mid-January.
To many investors it would seem that the data scandal at Facebook should not have such broad reaching implications on the markets and technology stocks in general. It is likely that as recent as a decade ago, we would not be as concerned about the change in sentiment in one stock. In today’s market however, due to the surge in recent years of passive investing, one widely held stock can have a greater impact on larger group of stocks. Passive investing is a means by which investors choose to own sectors or “baskets” of securities, also known as exchange-traded funds or ETFs, in order to get exposure to industry groups that they want to own. In the case of Facebook, the largest technology ETF is the Technology Select Sector SPDR, with over $20 billion in assets. Facebook is the third largest holding in the portfolio, representing almost 7% of the assets. If investors that have exposure to the technology sector through this type of investment decide that they want to sell to eliminate their holdings in Facebook, selling shares of the “basket” triggers selling in all the names that are held by the ETF. The top two holdings of the Technology Select Sector ETF are Apple and Microsoft. Therefore, in a world of concentrated positions held by passive investors buying sectors rather than individual holdings, one name can move many stocks at the same time. For active managers, this can lead to opportunities as companies within the “basket” get punished for no fundamental reason at all. From the date the news was released on the 16th of March to the close of the market at the end of the month, Facebook shares declined a little more than $25. This represented a 13.6% decline and a loss in market cap of nearly $74 billion dollars.
President Trump has had a hand in the market decline this month in at least two areas that the headlines correlate in some way with the market moves. With technology shares already on the ropes, President Trump took to Twitter in his campaign against Amazon. Citing its monopolistic business model and abuse of the U.S. postal system, investors began to fear government intervention and regulation. As Amazon extends its reach in the economy by moving into the grocery market through its purchase of Whole Foods, a desire to move into the pharmacy business, and its announcement to develop its own delivery fleet, maybe consumers should be asking more questions about what it ultimately means to the economy. For markets, attacking Amazon has put another giant in the crosshairs. This is especially meaningful due to being one of the most widely held stocks and again, representing a major position for passive investors. The largest consumer discretionary ETF, with over 13 billion in assets, maintains Amazon as it largest holding with slightly over a 20% weight. The second largest holding is Home Depot, with just 7% of assets. Amazon shareholders were down 9.45% from March’s high at the close for the month. The media questions the intent of the President’s interest in Amazon, noting that the CEO, Jeff Bezos, owns the Washington Post, which is often critical of the President. This is likely to continue to play out in the markets and the headlines for months to come.
More shakeups in the White House and fear of a trade war with China were certainly unsettling to investors this month as well. It started with the resignation of Gary Cohen, Trump’s top economic advisor. During last August, there were rumors that Cohen was going to resign as economic advisor, sending the markets tumbling. Viewed by Republican lawmakers as the steady hand that could prevent President Trump from engaging in activities that could trigger trade wars, the announcement of his departure increased uncertainty in the financial markets. Trump’s announcement of tariffs on aluminum and steel imports was in stark contrast to Mr. Cohen’s views on free trade and the negative impact of tariffs on the economy. As if Mr. Cohen’s departure was not enough, one week later the markets were made aware of the firing of the Secretary of the State, Rex Tillerson. Unfortunately for Mr. Tillerson, the news of his firing came via a tweet from the President that he was being replaced by Mike Pompeo, director of the CIA. Disagreement over policy relating to North Korea was just one of many conflicts between Mr. Tillerson and the President. A revolving door at the White House and the announcement of tariffs potentially leading to an escalation in our relationship with China, were more reasons for investors to take a pause this past month.
Within days we will begin earnings season and have the ability to quantify the impact of all the noise on corporate earnings. Investors will be looking for every clue they can get to determine if the economy is still on track. A pause and a correction are a normal part of the process and the released data will help us determine if these markets deserve to get back on track. So far, the economic data that we have suggests this is nothing more than the pause that refreshes. It has been a long run from the lows we saw back in 2009. There have been several corrections along the way, as well as many hurdles and reasons to worry about the future. This year has also left us with additional reasons to question the status quo. Increased volatility can often lead to the source of opportunity within the market. The increased uncertainty raises the wall of worry, which is said to be what bull markets like to climb. Let’s keep climbing!