Renewed concerns over the severity of trade tensions, a flattening yield curve, negative news out of the homebuilding space and other geopolitical uncertainties have investors feeling anxious. December 4 marked the worst day for the Dow Jones Industrial Average since October 10.
By Kris Rosemann
What was once thought to be broad-based optimism related to potentially easing trade tensions between the US and China (FXI) and investors taking a liking to recent commentary from the Fed regarding an easing of the future trajectory of rate hikes came tumbling down during the trading session December 4. President Trump tweeted early in the session that people should remember he is “a Tariff Man” if a trade deal cannot be reached with China, which only added to speculation over the probability of a formal agreement being completed as the White House walked back some of the recent positive themes that came from the G20 Summit over the weekend. All three major averages ended the day down 3%+, and the Dow Jones Industrial Average just missed an 800 point decline.
Meanwhile, the US Treasury benchmark 10-year yield (IEF) continued its decline under the 3% mark as trade tensions, commodity price uncertainty, volatile equity prices, and concerns over the potential for global economic growth to slow brings investors toward the risk-free security. News surrounding Brexit (EWU) has been starkly negative more recently, only adding to the level of geopolitical uncertainty being considered by investors, and the spread between the 10-year US Treasury yield and the 2-year yield continues to tighten as it finished the December 4 trading session at roughly 12 basis points, which marks the narrowest spread since 2007. This comes after the 3-year and 5-year Treasury yield spread inverted December 3 for the first time since 2007, which was shortly followed by the 2-year and 5-year spread inverting. Though these spreads are not a widely followed measure, some market observers believe it may be a foreshadowing of things to come.
Bank stocks (XLF) led the sell off as the group is sensitive to the flattening yield curve, which raises concerns over the health of net interest margins by which they generate income. Lower broader economic confidence is also likely hurting the banking sectors as hopes for more meaningful trade tension relief have been all but dashed for the time being, and the falling 10-year yield is often viewed as an indication that an increasing number of investors are concerned about the pace of US economic growth moving forward. At the end of the day, the SPDR S&P Bank ETF (KBE) had fallen 5.33%, and concerns regarding the health of the auto and housing markets are certainly not helping banking confidence. Shares of the SPDR Regional Banking ETF (KRE) dropped nearly 5.5% on the day.
The iShares US Home Construction ETF (ITB) was another big loser December 4 as shares fell 4.75% over the course of the trading session after Toll Brothers (TOL) reported a significant drop in demand in California, which led to the first year-over-year decline in new home orders for the company since 2014 and raised red flags over the potential for meaningfully slowing demand. This comes after news broke last week that October new home sales fell to a near-three-year low, and the sell-off showed little concern for the now-falling mortgage rates that had raised affordability concerns for homebuilders for most of 2018.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.