When my daughter was in kindergarten, among the classic children’s books that I frequently read to her was Alexander and the Terrible, Horrible, No Good, Very Bad Day. That title popped into my head today, as I observed the technology sector tank yet again.

Tech stocks continued hemorrhaging Monday, pushing the main indices sharply lower. The tech-heavy Nasdaq fell 1.39%, marking the index’s third consecutive drop of more than 1%. The benchmark Technology Select Sector SPDR ETF (XLK) fell 1.56%.

Last week’s Facebook (NSDQ: FB) plunge still weighs on Wall Street, feeding worries about the sustainability of tech-stock growth.

Even good earnings news brought terrible results. Caterpillar (NYSE: CAT), the construction equipment giant and Dow component, reported strong second-quarter earnings before the opening bell. Caterpillar posted earnings per share (EPS) of $2.97, beating the consensus expectation of $2.73. Revenue came in at $14.01 billion versus the expectation of $13.89 billion.

Caterpillar hiked its full-year EPS forecast to a range of $11 to $12, an increase of 75 cents per share from its previous guidance.

However, in an ominous sign for the economy, Caterpillar said it expects tariffs to boost its material costs by as much as $200 million in the second half of 2018. The company said it would offset those higher costs with price increases this year. The news about higher material costs underscored investor concerns about inflation and pushed CAT shares down today by 1.97%.

Consumer prices increased 2.9% in June 2018 from a year earlier, the fastest rate of increase since the early recovery period of 2011-2012. U.S. tariffs and federal budget deficits are likely to lift that figure even higher, which in turn could compel the Federal Reserve to hike interest rates further than planned.

The Fed’s Federal Open Market Committee (FOMC) will release a statement Wednesday, after two days of talks. The FOMC is likely to declare that additional rate hikes are imminent, perhaps as soon as September.

Then versus now…

Cue Frank Sinatra: It Was a Very Good Year…

Investors are wistful for 2017. After days like today, who can blame them?

Not only did world stock markets rise in 2017, but they did so in steady fashion. In nearly every month, the MSCI World Index posted gains, while the CBOE Volatility Index (VIX) remained at low levels. The following chart sums it up (*long-term average=19; data from Thomson Reuters):

 

Despite a slew of dire headlines that should have derailed the bull market, the three main stock indices enjoyed solid gains last year:

But that was then; this is now.

This year’s stock market gains have been comparatively modest. Year to date, as of today’s market close, the Dow is up 2.38%, the S&P 500 is up 4.82%, and the Nasdaq is up 10.53%. Volatility as measured by the VIX has been high. Today, the VIX jumped nearly 10%.

Offsetting inflation and interest rate fears are robust corporate earnings. According to research firm FactSet, with 53% of S&P 500 firms reporting actual second-quarter results, 83% of firms have reported a positive EPS surprise. For Q2 2018, as of July 27, the projected blended year-over-year EPS growth rate for the S&P 500 is 21.3%.

But amid these high expectations, disappointments are getting harshly punished.

Facebook’s “Black Thursday” was a wake-up call for investors who hope that stock gains this year can come close to matching last year’s. The social media giant’s stock plunged nearly 20% last week after reporting weak operating results.

After watching Facebook lose $120 billion in valuation in one trading session, investors are starting to worry about other richly valued, mega-cap tech stocks. Facebook’s crash on Thursday was the first time in the history of the U.S. stock market that a company lost over $100 billion in a single day. FB shares today fell another 2.19%.

“Story stocks” like Facebook provided the fuel for the stock market’s rise in 2017, but the recent woes of these erstwhile stars could signal a sector rotation in the second half of 2018, from momentum to value.

The escalating trade war remains a wild card. FactSet recently searched for the term “tariff” in the conference call transcripts of the 159 S&P 500 companies that had conducted second quarter earnings conference calls through July 25. Among these 159 companies, 70 (or 44%) cited the term “tariff” during the call.

President Trump now wants to funnel $12 billion in emergency aid to farmers hurt by… yep, his tariffs. This trade war increasingly resembles another children’s classic, Lewis Carroll’s Through the Looking-Glass, which depicts a surreal and illogical world.

Just remember that over the long haul, it’s earnings and not political headlines that govern valuations.

Tomorrow we’ll get earnings results from Apple (NSDQ: AAPL), which will help determine whether the tech sector experiences yet another terrible, horrible, no good, very bad day.

Monday Market Wrap

• DJIA: 25,306.83 -144.23 (0.57%)
• S&P 500: 2,802.60 -16.22 (0.58%)
  
• Nasdaq: 7,630.00 -107.42 (1.39%)
  

Monday’s Big Gainers

• Myers Industries (NYSE: MYE) +15.64%

Industrial products distributor excels on earnings.

• Mercury General (NYSE: MCY) +8.46%

Insurance company’s earnings beat expectations.

• EP Energy (NYSE: EPE) +5.02%

Analysts bullish on oil and gas producer.

Monday’s Big Decliners

• Changyou.com (NSDQ: CYOU) -13.59%

Online game developer issues weak operating results.

• Sohu.com (NSDQ: SOHU) -13.36%

Online search firm misses on revenue.

• Origin Agritech (NSDQ: SEED) -10.60%

Agri-biotech pressured by trade war.

Letters to the Editor

“An income stock that I own just cut its dividend. Should I be worried?” — Jane M.

Companies that reduce dividends aren’t necessarily on the road to bankruptcy. But a dividend cut can indicate danger ahead. If a company you own has slashed its payout, watch for falling or volatile profitability, an excessively high dividend yield compared to peers, and negative free cash flow.

Questions about dividend stocks? Drop me a line: mailbag@investingdaily.com

John Persinos is the managing editor at Investing Daily.