Thus far in 2018, we’ve dealt with far more uncertainty injected into the market than we have seen in some time, and this week was a doozy from a new tone out of the Federal Reserve to rising talk of trade wars, never mind the shuffling of personnel around the White House.
The week started off on a seriously rough note with the Technology sector taking some serious punches as Facebook (FB) suffered its worst day in over six years, losing more than 7% as investors worried about ramifications from the possible abuse of Facebook’s user data by Cambridge Analytica. Monday also saw the U.S. Treasury selling $51 billion in 3-month bills and another $45 billing in 6-month bills. Over the past month, the Treasury has sold a record $747 billion in bills on a gross basis, the highest relative to the stock of outstanding public debt since the end of 2009 Treasury Bill issuance is at a record high relative to the size of the economy. That is a lot of investable capital being sucked up to pay for record level deficit spending outside of a recession or a war. Given the trade war saber rattling emanating from DC and China, we’re not surprised investors are flocking to this safe haven.
On Tuesday Facebook dropped hard again, as much as 12% from the prior Friday’s close, but managed to rally to close down just 2.5% on the day as Oracle (ORCL) found itself in the spotlight of investor angst, losing almost 10% on slower cloud sales guidance. The S&P 500 and the Tech sector managed to eek out a close in the green, but the Russell 2000 closed slightly in the red.
Wednesday was the first press conference for the newly appointed Federal Reserve Chair Jerome Powell and he showed that there is definitely a new monetary sheriff in town. Powell indicated that he is much less focused on the Fed’s models and projections and more on the actual data. For years, Fed officials have recited the mantra of being data-dependent, but the actions of the Fed were clearly more model-driven. For example, when unemployment reached 6.5% when the Fed did not tighten policy as it had claimed it would. While we like the focus on data versus models, in part because it’s how we roll here at Tematica; the market wasn’t too pleased as it looks like (and we expected) that Fed punchbowl is going to be drained faster than many had hoped. The major indices were down as much as 1.5% in the morning trade as investors adjusted their expectations to the more hawkish tone out of the Fed. By the way, had just one person voted differently, the Fed would have plotted a total of four hikes in 2018, so there is a very real probability of having more than three this year.