Choppy Session Ends Mixed; Fear Gauge Rises
A growing number of Wall Street analysts are joining the chorus of Cassandras. They’re warning of an imminent investment apocalypse — a “Black Swan,” if you will.
Whether you think the Trump administration is a menace or a savior, you should stick to your long-term investment goals. The markets are resilient and profitable over the long run, regardless of who sits in the Oval Office.
That said, volatility returned with a vengeance to the stock market today, as investors surveyed a landscape littered with landmines. The major indices closed mixed, with the tech-heavy Nasdaq pulled sharply lower by a FAANG stock retreat.
The Dow Jones Industrial Average was pushed higher by a jump in shares of component McDonald’s (NYSE: MCD). The fast-food giant pleased analysts by announcing cost-cutting measures. MCD shares today rose 4.37%, adding nearly 50 points to the Dow’s price.
The S&P 500 closed in the red, after seesawing throughout the session. The CBOE Volatility Index (VIX), aka the “fear gauge,” jumped 6.79%.
What accounts for this spike in volatility? There’s a variety of destabilizing developments on the horizon. It’s not unrealistic to fear the appearance of a Black Swan.
In Wall Street lingo, a Black Swan describes a shocking, unexpected event that carries disproportionately high consequences. A classic example of this rare bird is the global financial crisis of 2008, triggered by the collapse of the sub-prime mortgage market in the U.S.
Byron Wien, vice chairman of Blackstone Advisory Partners, warned today in a television interview: “My feeling is that there’s something lurking out there…that is going to upset the market.”
Wien is a Wall Street legend; when he speaks investors pay attention. He cited souring U.S. relations with North Korea as a possible trigger for a market meltdown. Former Reagan budget director David Stockman this week predicted that the stock market will soon collapse by as much as 50%, due to “daredevil” risk-taking.
Rising rates are another worry. The latest employment numbers cement expectations that the Federal Reserve will hike rates a total of four times this year, not the initially expected three times. Rising rates are historically bad for stocks.
The Fed is scheduled for a policy meeting June 12-13, at which time it’s expected to raise interest rates again. The Fed last lifted borrowing costs in March.
The U.S. Labor Department reported Thursday that initial claims for state unemployment benefits decreased 1,000 to a seasonally adjusted 222,000 for the week ended June 2.
The unemployment rates now stands at 3.8%. The last time the jobless rate was this low was in the spring of 2000. The stock market collapsed a year later.
As of September 24, 2002, the Dow had lost 27% of the value it held on January 1, 2001, for a total loss of $5 trillion. Ask yourself: how would a portfolio loss of nearly 30% affect your retirement plans?
Meanwhile, trade conflict won’t go away anytime soon. Reports surfaced today that President Trump’s tariff on imported solar panels has led U.S. renewable energy companies to cancel or freeze investments of more than $2.5 billion in projects. Thousands of jobs will be lost. The White House continues to threaten potentially ruinous tariffs on not just China but also America’s allies.
Headline risk hangs over the markets every day. Investors live in fear of the cable news chyron.
Look Black Swans in the eye…
The insidious aspect of a Black Swan is that it seemingly comes out of nowhere, in a form you didn’t expect.
Known worries include aggressive monetary tightening, a brewing trade war, a possible shooting war overseas, and an unpredictable White House. But stocks can suddenly tank for a reason you never envisioned. The prevalence of algorithmic trading exacerbates sell-offs, turning downturns into “flash crashes.”
Take protective measures. Elevate cash levels in your portfolio and invest at least 5%-10% in precious metals such as gold. Predictions for gold prices are all over the map, but the consensus is for double-digit gains over the next year.
Pare back your growth stock allocations. One area where you should stay fully invested, though, is aerospace/defense.
Even before the November 2016 election, the Pentagon wasn’t exactly rattling a tin cup for funds. But under a Trump regime, the nation’s already ample defense budget has gotten huge boosts.
Overseas trouble spots are heating up. The Middle East is engulfed in strife, as assertively pro-Israel policies rankle the Palestinians. North Korea continues to rattle its nuclear-tipped saber. These tensions benefit large-cap military contractors.
But avoid over-hyped “story stocks.” Indeed, tech-sector darlings took a beating today, as investors questioned highly optimistic growth assumptions.
Instead of cowering at the prospect of a Black Swan, look it firmly in the eye and prepare now.
Thursday Market Wrap
- DJIA: +0.38% or +95.02 points to close at 25,241.41
- S&P 500: -0.07% or -1.98 points to close at 2,770.37
- Nasdaq: -0.70% or -54.17 points to close at 7,635.07
Thursday’s Big Gainers
- Vishay Intertechnology (NYSE: VSH) +13.30%
Analysts turn bullish on semiconductor maker.
- ABM Industries (NYSE: ABM) +10.93%
Building facility provider beats on earnings.
- Ophthotech (NSDQ: OPHT) +10.36%
Biotech inks therapy licensing agreement with universities.
Thursday’s Big Decliners
- Proteostasis Therapeutics (NSDQ: PTI) -38.16%
Investors unimpressed with biotech’s clinical trial results.
- United Natural Foods (NSDQ: UNFI) -14.29%
Food distributor posts uninspiring earnings.
- American Superconductor (NSDQ: AMSC) -7.43%
Electronic component maker posts dismal operating results.
Letters to the Editor
“Trump promised big spending on infrastructure. Are construction firms good plays now?” — Neil B.
Investors originally thought construction companies would reap a windfall from infrastructure investment under Trump, but this spending boost hasn’t materialized on the federal level.
States and localities have stepped into the breach somewhat, but the federal deficit created by tax cuts has made major new infrastructure spending a non-starter in Congress.
Questions about so-called Trump plays? Shoot me a question: firstname.lastname@example.org
John Persinos is managing editor of Personal Finance and Radical Wealth Alliance, as well as chief investment strategist of Breakthrough Tech Profits.