Could do better
April and the second quarter of 2018 carried on exactly where March and Q1 had finished – volatile. The financial media made a big story out of the fact that markets had not opened the second quarter as poorly since 1929 – mostly missing to mention that the 2-3% April 2 decline was less than what markets staged during more than one day during March. And just as before, the recovery was just as swift the following day, and stock markets ended the week broadly where they had started.
The Big Tech Scare – understanding the drivers
Technology stocks took another battering at the beginning of the week. Heavy losses from Amazon, Tesla, Microsoft and others drove a plunge in the sector and equities more broadly. The S&P 500 index was down 2.2% on Monday, its worst start to April since 1929. And the tech-heavy Nasdaq fared even worse, ending the day nearly 3% down. The rest of the week saw improvement in equities, with a rally on Wednesday putting the S&P back up to where it ended last week. But ‘Big Tech’ still lagged the rest of the pack, sinking lower in the sell-off and not climbing as high in the rally. As the chart illustrates, while the recent correction to US tech stocks feels sizeable, the sector is still in positive return territory for 2018, and up around 250% since the beginning of 2016.
What’s priced in? A global economy too hot or too cold?
The recent equity market corrections have led investors to ponder if they should buy the current dip, sell down or hold onto their positions and ride out the rise in volatility. The answer to that question hinges on the outlook for the global economy, since the underlying economy is what ultimately drives company profits and thereby stock markets.
Earnings season preview
As we have discussed many times, the US equity market has been trading at relatively elevated valuations for a while. There has been much discussion about what multiple of earnings can or should be justified. For context, we have included some recent measures of price to earnings multiples (using trailing and forward earnings) of FactSet’s US equity index.
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