An analysis of the market sell-off: Whats likely causing it and how worried you should be

  • The S&P 500 has dropped 3% from its record high. Economically cyclical groups have been purged. Bonds are leading stock returns one month into the year.
  • Something was bound to come along and prompt a pullback. As it happened, the viral outbreak arrived to do the job.
  • Given that a perfectly routine decline following a strong multi-month rally could amount to 2% to 5%, a further drop of 2% to 3% would not compromise the broader uptrend.
  • Bond markets pricing in a high likelihood of another Fed rate cut around mid-year.

Wall Street is suffering a risk-off relapse, producing a milder but familiar set of the symptoms felt during last year’s overdone summertime recession scare.

Bond yields have rushed toward their old lows, flattening the gap between very short-term and 10-year Treasuries. World growth expectations are rolling over, as China’s work and travel restrictions to contain the Wuhan coronavirus defer the payout of the trade-peace dividend that investors expected after the U.S.-China trade deal.

And a stock market has gotten a pretty good rinse — though not yet a true washout. The S&P 500 has dropped 3% from its record high. Economically cyclical groups have been purged. Bonds are leading stock returns one month into the year. And the top-performing sector for the year so far is utilities, followed by the marquee tech giants believed to be impervious to economic ebbs and flows.

All this is happening in a market that had become quite stretched in terms of valuation, investor sentiment and positioning, as noted here three weeks ago. Something was bound to come along and prompt a pullback. As it happened, the viral outbreak arrived to do the job, in the process fogging the growth outlook and draining risk appetites.

Source: https://www.cnbc.com/2020/02/01/whats-likely-causing-the-market-sell-off-and-how-worried-you-should-be.html

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