Equity market volatility remained rampant during the shortened holiday week and the catalyst stemmed from downside in the technology sector. Although most domestic equities yielded losses, the precipitous downside of major technology companies added the most to broad negative returns. The Standard & Poor’s (S&P) 500 Index closed the week lower by 3.77% and the S&P Technology sector, on a standalone basis, lost over 6% for the week. Nearly 18% of the technology index is comprised of Apple, a holding that is down 26% since the start of October. It remains rather unclear as to the exact catalyst for losses in the technology sector but it’s possible, in our view, that the exuberant valuations of most names (such as that of Netflix and Amazon, as dictated by the Price-to-Earnings ratio) may have spurred fears across investors that future revenue streams may not justify such high valuation levels. We’ve discussed the nature of such possibilities numerous times in the past and remain committed to sound balance sheet analysis as a main indicator of strong equity holdings over numerous market cycles. A question that we’ve screened over the past week has been whether or not it’s a good time to initiate exposure in the technology sector. The answer is maybe. From a purely technical standpoint, it appears that major technology names have entered a bear market and are nearing oversold conditions. Historically, this may mean upside is possible. On the other hand, further downside remains a possibility given that we do not know the results of the latest holiday shopping spree. More to come on this as data becomes available. Whatever the case may be, however, any allocation to any sector should be part of a further diversified allocation so as to avoid unsystematic risk that can otherwise diminish short-term returns. Employing multiple strategies, structured objectively and independently of each other, may be able to further amplify long-term returns.
On the economic front during the week, we learned that October housing starts gained ground but remained below expectations. The trend thus far in 2018 has been rather neutral for housing starts with a slight bias to the downside. When breaking down the data geographically we see an uneven allocation of growth, one that can likely be explained by seasonal and weather factors. The Midwest is certainly posting higher than average figures tied to housing starts whereas the coasts appear slightly more subdued. Data tied to existing home sales was also released during the week and we learned that October’s sales yielded an annualized pace of 5.22 million units (1.4% increase month-over-month). The data remains strong despite the fact that we’re off the recent highs. We remain optimistic on the housing market given that mortgage rates are still attractive and overall monetary policy guidance appears less aggressive amidst the latest cycle of equity market volatility. The downside catalyst that may emerge over the next 12 months may be tied to higher material and building costs, in our view, a trend that has just recently been showing signs of upside pressure.
In other economic data points, durable goods orders for October were announced lower by 4.4% from the previous month. The effect of tariffs may be evident in the latest figure and the risk remains high that further downside pressure may be possible in the event that domestic protectionism remains a dominant talking point within fiscal policy reform. We believe open trade and a removal of tariffs may be the best approach to synchronized global growth.
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Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.