The year-end rally is in serious doubt. Selling is accelerating and feeding on itself. The S&P is down 3.2% in a week, the -4.2%, the is down 5%, and the -3.1%. The even-weighted S&P is down 2.6%, the Magnificent 7 is down 5.3%, semiconductors -6.3%, and -6.2%. It’s a broad-based sell-off, on pace for the worst November since 2008. For the trailing month, only healthcare and energy are in the green, but technology is only down 0.5%, with the worst sector being consumer staples, -3.7% which is also the only sector down YTD (-2.3%).
Keeping things in perspective, a 5% correction is normal and technically overdue. In this case, the leverage of the correction is amplified by the extreme weight of Mega Tech and the fear of an AI bubble, where over 50% of investors fear an AI bubble is happening. Fortunately, earnings are holding up very well; no one questions that AI holds the promise for huge gains in productivity. The uncertainty is centered around the timing of when the productivity will ramp and where and how the profits will be made.
This week, we’ll get several consumer-facing earnings reports. It got off to a weak start with , which had a meet on the top and a miss on the bottom. But the company cut its full-year outlook and reported “ongoing consumer uncertainty” and “continued pressure in housing”. The shares are down 4% (-11.7% YTD). The housing market has been frozen by all the record-low mortgage rates in place and high prices. Home builders are reporting increasing amounts of discounts needed to move inventory. This is an important engine in the economy, generating many jobs and associated spending that has been hamstrung by persistently high mortgage rates.
Interest rates have finally started moving down. The US 2-year is down 5 bps to 3.55%, the 10-year is down 4 bps to 4.09%. This is a normal reaction to a stock market correction, reflecting recession fears. Bets for a quarter-point Fed cut next month have risen to 46%.
Of concern is the rising yield of the Japanese government bonds, where their 10-year now yields 1.75%, up from 1.03% in a year. This is problematic as selling Japanese bonds as a cheap source of funds to hedge into higher-yielding holdings has been going on for a long time and is quite sizable. This move in yields may force the unwinding on the trades and may have interesting ripple effects.
Tomorrow, we get NVIDIA earnings, which will be a watershed in the AI / Mega Tech theme. If it goes very well, as it should, given all the spending that continues to be announced, we could see a major rebound. If it is more cautious, we could see a further leg down in the correction. If NVIDIA goes well and the Fed cuts in December, we may still end the year on a high note, though new all-time highs now appear to be wishful thinking after the current correction.