By Troy Tanzy
Tuesday (12/4) was a rough day for the stock market, which saw a widespread erasure of Monday's gains and some of last week's gains as well. Each of the three popular domestic broad equity indexes (the Dow Industrial, S&P 500, and NASDAQ) fell by more than 3%, faltering under the weight of economic and geopolitical concerns. The following chart from The Wall Street Journal shows the progression of losses throughout the day. Investors turned to so-called safe-haven assets, including government bonds. As a result of the increased purchasing of bonds, yields declined so much that concerns of a yield-curve inversion surfaced, exacerbating the sell-off out of equities. Bond yields move inversely to prices, so when bond prices rise as a function of increased demand, yield declines. Yield on the 10-year Treasury note declined further today (12/5) in proportion to the decline in yield on the two-year Treasury note, bringing the yields between the two bonds closer. A yield-curve inversion occurs when yields on bonds of longer maturities fall below those of bonds with shorter maturities, and the case investors care about most is the two-year and 10-year inversion. The yield-curve inversion is a signal that economic woes are to come, says DoubleLine CEO and so-called bond king Jeffrey Gundlach, as reported by CNBC. The shorter-term rates are typically impacted more by the Federal Reserve's monetary policy changes, and a further rate hike by the Federal Reserve could push the two-year note above the 10-year, meaning the Federal Reserve could effectively force an inversion with its policy. This instance now restricts the Fed's plan to raise rates into 2019. The longer-term rates, which typically aren't dictated as much by policy as they are by economic and inflation expectations, show investors are wary about future economic growth. The following chart from The Wall Street Journal shows how close yields have grown in recent days. While economic growth was a major concern in markets throughout the day, geopolitics was also at the forefront of investors' minds. Markets rallied on Monday (12/3) following the positive meeting between leaders from the U.S. and China over the weekend. However, optimism that a trade agreement would be reached and tariff increases on $200 billion worth of Chinese goods would be avoided subsided on Tuesday. Investors are fearful yet again that heightened tensions could hamper global economic growth and free trade. Uncertainty over tariffs and global trade have loomed over the markets for the entire year, fueling volatility and fear. Concerns about the flattening yield curve and tariffs are not unique to Tuesday. Moving forward, concerns such as those will continue to hover over the markets and the economy, both of which have experienced a long and strong positive run over the last decade.
Sectors: The average momentum score for the Sector Benchmark ETFs jumped from -45.09 to -30.82 following a strong week for equities. All 11 sectors tracked were positive for the week. Utilities continues to lead the pack, followed by Real Estate and Consumer Staples. The biggest gainer for the week was Technology, which picked up 26 points but remains at the bottom of the rankings.
Factors: Among the Factor Benchmark ETFs, the average factor score increased from -53.08 to -37.67 as domestic markets rallied. All of the factors tracked gained ground for the week, with Momentum adding 27 points and moving up a spot in the rankings. Investors remain hungry for Yield: The factor has been in the top spot for quite some time now.
Global: The average Global Benchmark ETF momentum score increased this week from -49.00 to -37.00. Pacific x-Japan remains the top global region, followed by Latin America. China gained 22 points for the week and is now in the fourth spot, passing World Equity and the USA for the first time since the tariffs were announced early this year. The Eurozone remains at the bottom of the rankings as major headwinds continue to put pressure on the region.