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Last Snort of a Dying Bull? Stocks Plunge Amid Tech, Retail Worries

Cue the opening strains of “The End” by The Doors. Are we finally witnessing the death of the bull market?

Troubling signs among bellwether tech and retail stocks helped push equity markets sharply down on Wednesday. Tax shenanigans on Capitol Hill didn’t help.

In today’s “post-truth” political environment, conventional facts don’t seem to apply. But the spin doctors can’t repeal the laws of finance. And these laws are pointing to trouble ahead.

The stock market’s swoon on Wednesday indicates that the correction could be upon us. All three major indices closed in the red. The decline was broad, with tech firms and retailers representing the largest losses. The Dow closed near a four-week low.

Target (NYSE: TGT) was a big loser for the day. The Big Box retailer issued a profit forecast for the holiday season that fell short of Wall Street’s expectations.

Target’s guidance stole attention from its better-than-expected third-quarter revenue and earnings. Target is revamping its store design to attract more Millennials. It’s also creating a boutique atmosphere to compete with e-commerce giant Amazon (NSDQ: AMZN).

TGT’s strategy appears to be paying off. But analysts weren’t happy with TGT’s pessimism about the holiday season. The days between Thanksgiving and Christmas can equal up to 40% of a store’s annual sales.

FANG stocks lose their bite…

After a sharp run-up this year, the technology sector is taking a breather. Headwinds include downbeat assessments of holiday spending. The growing improbability of a generous tax repatriation policy also is hurting the sector.

The FANG coterie fell across the board on Wednesday, dragging down the tech-heavy Nasdaq. Facebook (NSDQ: FB), Apple (NSDQ: AAPL), Netflix (NSDQ: NFLX), and Google parent Alphabet (NSDQ: GOOGL) posted declines of -0.07%, -1.32%, -1.83%, and -0.50%, respectively. The disproportionate influence of these stocks underscores the bad breadth that afflicts the market.

Apple came under pressure largely because of emerging production problems with its iPhone X. AAPL’s drop extended the stock’s losing streak to five sessions.

The bull market is now more than eight years old. That’s ancient by historical standards. Spawned in the spring of 2009 amid the ruins of the Great Recession, the current market upswing is the second longest in U.S. history. The latest bull surpasses the winning streak that stretched from 1949 to 1956. We’re long overdue for a correction.

Exacerbating the danger are excessive valuations. While stocks typically have a trailing price-to-earnings ratio (P/E) of 15, they now hover at a trailing P/E of about 25. That means stocks are priced nearly 67% higher than their 10-year average.

Another warning sign is bad breadth, which occurs when fewer and fewer stocks are participating in the upswing. It usually means that the major indices are at a peak, because a minority of companies is driving overall market performance.

Analysts are expressing concern that equity breadth has been declining over the past several months.

To be sure, U.S. economic growth has remained on track, but the recovery is due for a cyclical pullback. Fundamental economic indicators are starting to sour, just as the holiday season gets underway.

Throughout the year, the broad stock market and energy prices have tended to move in tandem. Wednesday was no exception.

Negative supply data weighed on crude oil prices. The U.S. benchmark West Texas Intermediate fell 45 cents to close at $55.25 per barrel. Brent North Sea crude, on which international oils are based, fell 38 cents to close at $61.83/bbl.

In the days ahead, keep an eye on the following economic reports, which will provide clues as to the recovery’s sustainability:

Thursday: jobless claims, industrial production, consumer comfort index, housing market index.

Friday: housing starts, e-commerce retail sales, Baker-Hughes rig count.

The stock market on Wednesday also reacted to the dimming prospects of tax reform. Republicans control the White House and both chambers of Congress, but the bitter partisan divide in Washington, DC shows no signs of easing.

The GOP Senate on Tuesday night added a bombshell to the tax package: repeal of the Obamacare insurance mandate. Traders realize that this unexpected provision amounts to a “poison pill” that makes passage of the bill even more unlikely.

Warren Buffett once said: “In the short term the market is a popularity contest; in the long term it is a weighing machine.”

After the 2016 election, the notion of a pro-business administration got Wall Street’s “animal spirits” racing. But as Wednesday’s declines showed, this sentiment is fizzling. Traders in recent days are more clearly weighing the risks ahead.

Will bargain hunters jump into the markets on Thursday and push indices back into the green? Or are we witnessing the start of a protracted decline? Only fools try to time the market. But caution should be your watchword. Let’s do the numbers.

Wednesday Market Wrap

  • DJIA -0.59% or -138.19 points, to close at 23,271.28
  • S&P 500 -0.55% or -14.25 points, to close at 2,564.62
  • Nasdaq -0.47% or -31.66 points, to close at 6,706.21

Wednesday’s Big Gainers

  • Alaska Air Group (NYSE: ALK) +4.46%

Air carrier thrives amid aviation’s resurgence.

  • Foot Locker (NYSE: FL) +4.00%

Retailer’s shares bounce ahead of 3Q earnings that are projected to be strong.

  • Signet Jewelers (NYSE: SIG) +1.88%

Upbeat assessment of pending operating results lifts shares.

Wednesday’s Big Losers

  • Target (NYSE: TGT) -9.88%

Retailer issues disappointing holiday guidance.

  • Halliburton (NYSE: HAL) -2.93%

Oilfield services firm falls along with oil and gas prices.

  • Brown-Forman (NYSE: BFB) -2.59%

Analysts turn negative on distilled spirits maker as consumer tastes change.

Letters to the Editor

“You often tout gold as a precious metals hedge. But what about silver?” — William H.

The classic hedge against fear and uncertainty, of course, is gold. But you should consider silver, an underappreciated alternative to gold that in many ways is a more effective hedge against crisis.

Unlike gold, silver boasts many vital industrial applications, making it less volatile than the Midas Metal. Unfolding trends this year make silver a well-timed growth opportunity.

Precious metals are classic safe haven hedges that guard your portfolio from unexpected shocks. Silver often takes a back seat to gold, but that’s shortsighted of the investment crowd. During bull markets for precious metals, silver historically has outperformed gold.

With most analysts now calling for a sharp and sustained rise over the next 12 months in silver prices, it’s time for you to gain exposure to the “white metal.”

Got a question? Drop me a line: mailbag@investingdaily.com.

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.

 

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