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Stocks Plunge as Headline Risk Rears its Head

By John Persinos on April 2, 2018

As they returned from a three-day religious holiday, investors on Monday encountered an unholy bloodbath. Breaking news is breaking Wall Street’s confidence.

Stocks kicked off the start of April with steep declines today, as concerns about trade and the technology sector flared anew. President Trump’s Twitter tantrum against Amazon (NSDQ: AMZN) torpedoed shares of the e-commerce giant, which in turn dragged down the tech-heavy Nasdaq.

The Dow Jones Industrial Average, S&P 500 and Nasdaq closed Monday’s trading session in correction territory and at their lowest levels of 2018. At its session low today, the Dow was down 758 points. The S&P 500 closed lower for the 11th time in 15 sessions. Roughly 20% of the S&P 500’s tech sector is now in a bear market.

New trade restrictions against U.S. goods were announced Sunday by China’s finance ministry. China hiked tariffs by up to 25% on 128 U.S. products, from wine and frozen pork to certain farm produce. The tariffs took effect today.

The Trump administration plans this week to announce a list of Chinese imports targeted for U.S. tariffs. The goal is to punish China over its protectionist policies.

The latest economic data spooked investors as well. The Institute for Supply Management reported today that its index of national factory activity fell to a reading of 59.3 last month from 60.8 in February.

The price of crude oil also slumped today, as investors anticipated falling energy demand from a slowing economy. The U.S. benchmark West Texas Intermediate dropped 2.73% to close at $63.17 per barrel. The price of gold rose 1.34% to exceed $1,345 per ounce, as traders sought a safe haven from crisis.

After a relatively calm 2017, volatility is back.

In February, stocks fell on reports of wage inflation and U.S. trade restrictions on imported steel and aluminum. The Dow crashed more than 3,200 points in February, or 12%, in just two weeks.

In March, the prospect of tariffs leveled at China again clobbered stocks. Then came rumors that China and America were negotiating to avert a full-blown trade war. The headlines, alternating between pessimism and optimism, whipsawed investors. The S&P 500 rose by 2.7% on March 26, its best day since August 2015. The next day, it plunged 1.7%.

The chart below, compiled with data from Thomson Reuters, depicts the market’s roller-coaster ride in the first quarter.

Wild Ride: The S&P 500 in Q1

Investors are looking back at 2017 with wistfulness. The stock market boomed; volatility stayed low. This year, a multitude of anxieties are coming to the fore.

The Federal Reserve is removing the monetary stimulus that has fueled the bull market since 2009. Recessions typically start when central banks raise rates too far, too fast. Meanwhile, economic data are starting to sour.

Consider the price of copper. The metal is a widely used commodity so sensitive to economic conditions, it’s viewed as a leading indicator. Because it’s a time-proven predictor of economic trends, copper is said to have a PhD in Economics. Hence the metal’s nickname “Dr. Copper.” So far this year, the price of copper has fallen by about 9%.

Now consider the behavior of the CBOE Volatility Index (VIX). The VIX is a key measure of market expectations of near-term volatility, as reflected by S&P 500 stock index option prices.

Known as the “fear gauge,” the VIX experienced a spike of at least 20% in six one-day trading sessions during the first quarter of 2018, including one session that saw a 20% plunge. The six 20% jumps represent the most ever for the VIX in a quarter.

Unlike Dr. Copper, the VIX is not a leading indicator. The VIX measures current fear. And that fear is growing. The VIX jumped more than 18% today.

The Facebook (NSDQ: FB) privacy scandal looms large. Combined, the five largest U.S. tech companies account for more than 14% of the S&P 500’s weighting. The “FAANG” stocks led the stock market rally in 2017. Now, they’re dragging the market down. FB shares fell 2.75% today, following a series of sharp declines since the Cambridge Analytica story broke.

The tech sphere was further shaken yesterday, when reports surfaced that a ring of cybercriminals purloined more than five million credit and debit card numbers from customers of Saks Fifth Avenue and Lord & Taylor.

Shares of Amazon fell 5.21% on Monday, after President Trump tweeted over the weekend that Amazon is a “scam” that costs the United States Postal Service billions of dollars. He also complained that Amazon pays little or no state taxes.

To set the record straight, Trump’s charges against Amazon are false. The USPS makes money off Amazon and the company pays a considerable amount in state taxes. But in this “post-truth” era, anything goes. Pundits speculate that Trump’s real agenda is to attack Amazon CEO Jeff Bezos because he owns The Washington Post, a newspaper that has been critical of the president.

As I wrote in my Friday column, headline risk is the biggest threat facing investors. The poet T.S. Eliot famously wrote that “April is the cruelest month,” to symbolize the pain of crushed hopes. Investor hopes were crushed today.  Stay cautious. April could indeed prove cruel.

Monday Market Wrap

  • DJIA: -1.90% of -458.92 points to close at 23,644.19
  • S&P 500: -2.23% or -58.99 points to close at 2,581.88
  • Nasdaq: -2.74% or -193.33 points to close at 6,870.12

Monday’s Big Gainers

Biotech announces successful clinical trials.

Diversified consumer products firm enjoys growing demand.

Hospital operator target of Walmart (NYSE: WMT) buyout.

Monday’s Big Decliners

Biotech posts disappointing earnings.

Fitness gadget maker’s new smartwatch gets poor reviews.

Analysts turn bearish on drug maker.

Letters to the Editor

“Are defense stocks a good play now?” — James C.

Rising geopolitical tensions worry investors, but it’s the sort of climate that’s manna for military funding.

Headline risk has reemerged to bedevil traders. U.S. stock markets reentered correction territory today, as the world braces for trade war. Russia, China and North Korea loom as military antagonists to America. The upshot: ever-higher defense budgets.

Got questions about sector investing? Send me an email:

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

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