the stock market

U.S. Stocks Just Erased All Their 2018 Gains. Here’s Why.

Seeing red. Photo: Drew Angerer/Getty Images

The stock market fell out of bed Monday morning. Then, it rolled across the floor, down a staircase, out the front door, and, by noon on Tuesday, had tumbled through an open manhole, plummeted into a sewer — regained consciousness long enough to climb a couple inches toward the light — only to slip off the ladder, and plunge back down through liquid waste toward the bowels of the Earth.

Or, in more technical terms: As of early Tuesday afternoon, the Dow Jones Industrial Average was down 450 points (after falling 400 points on Monday), while the S&P 500 had declined by 1.4 percent (after sinking by 1.7 percent Monday), turning both indexes negative on the year. Meanwhile, the Nasdaq hit a seven-month low, leaving the the tech-centric index more than 10 percent below its most recent peak, and thus, firmly in “correction territory.”

And you, dear reader, were wondering who or what had provoked the market gods’ wrath — and whether the latter will dissipate anytime soon.

So here’s a (non-comprehensive) rundown of what’s troubling the beleaguered market, and some scattered bits of speculation about what those troubles portend.

1) The techs are getting wrecked.

For most of the Trump era, the tech sector has been the market’s propeller — but now, it’s turning into an anchor. Since their recent highs, Facebook, Amazon, Apple, Netflix, and Alphabet (a.k.a. Google) have collectively lost nearly $1 trillion in market capitalization.

There is no firm consensus about what has caused this precipitous decline. But some of the contributing factors appear to be:

• The Trump administration’s ongoing trade war with China is starting to unnerve tech investors — which makes sense, given that the dispute is centered on issues of intellectual property rights and what conditions U.S. tech firms will be forced to accept in order to access the Chinese market. “The trade conflict is a tech arms race and something not likely to be resolved in any major way in the near term,” Jared Woodard, global investment strategist at Bank of America Merrill Lynch, told the Wall Street Journal Tuesday. “We suggest more pain for financial markets is likely.”

• Facebook’s internal conflicts and public relations crises have fueled fears of user or regulatory blowback.

• Apple’s new iPhone sales have been disappointing, leading analysts to lower the computer hardware giant’s forecasted earnings for 2019.

A bear of a time. Illustration: The Wall Street Journal

2) Target’s workers are getting raises.

This week, Target revealed that it’s facing higher-than-anticipated costs, both to maintain its supply chains and retain its workers. Which is to say: The tight labor market (and/or Amazon) is finally delivering significant wage growth to retail workers — and thus, eating into retailers’ expected profits. Target’s shares fell more than 7 percent Tuesday, bringing down other retail stocks along with them.

3) Corporate bondholders are getting nervous.

Earlier this year, U.S. corporate debt hit a record 45.5 percent of GDP — levels unseen since the Great Recession. That said, unlike in previous moments of exceptionally high corporate debt, the default rate on corporate bonds has actually been falling — from 5.9 percent in January 2017 to 3.4 percent this past June.

Nevertheless, as earnings forecasts for 2019 have turned more pessimistic in recent weeks, and interest rates have crept up, concerns about America’s extraordinary levels of corporate debt have come to the fore. General Electric’s debt load is especially concerning. The (declining) conglomerate is among the world’s biggest borrowers — and its bonds are currently rated just three notches above junk. If those bonds were ultimately downgraded to junk status, it just might trigger a market panic worse than the one that followed the downgrading of Ford and GM bonds in 2005. As James Mackintosh argues in the Journal:

GE’s financial troubles are self-inflicted, not a sign of broader problems in the economy. Yet, it is the world’s sixth-most indebted nonfinancial company, behind Volkswagen , Toyota, AT&T , SoftBank, Ford and Daimler. And it has more traded debt outstanding than any of them, totaling $122 billion, according to Refinitiv. It is big enough to shake the entire market.

…With more leverage and fewer protections, the debt markets are more vulnerable to a shock today than they were, so a GE downgrade could end up more serious than the 2005 fright. Indeed, many were already worrying that excesses in leveraged loans—a type of highly-geared floating rate debt typically used in private equity buyouts, not issued by GE—could significantly worsen any economic downturn.

4) The “buy-the-dippers” are getting concerned.

After a brutal early October, stocks began recovering a bit late last month. But it’s possible that this uptick was fueled less by bullish long-term investors than by speculators who thought the market had some medium-term upside — but not much more than that — and thus, hoped merely to “buy the dip.”

5) The affluent are getting poorer — and thus, more frugal.

For the moment, the anxieties riling in Wall Street are hardly visible in the real economy. The U.S. grew at 3.5 percent clip last quarter, household wealth hit record levels earlier this year, unemployment is near historic lows, and wages are rising. So, should Americans who don’t own stocks be worried by the all the red arrows streaming across their TV screens?

One can reasonably argue that they shouldn’t be. But the counterargument is that many top investors are behaving as though they expect economic growth to be markedly slower in 2019 — and that those expectations just might prove self-fulfilling: When the stock market falls, so (typically) do home values, and when the Americans who own such assets start feeling poorer, they start spending less, and economic activity slows.

As Peter Cohan writes for Forbes:

When stock prices rise, those who own them feel confident in bidding up the price of real estate. What’s more, when interest rates are low, they don’t mind borrowing lots of money to buy the houses.

Conversely, when stocks fall, it does not take long for people to suffer from a reverse wealth effect…Consider the sudden reversal in the country’s priciest real estate market – the San Francisco Bay Area.

According to the San Francisco Chronicle, in San Francisco, the number of homes with a price cut in October 2018 nearly doubled, to 238 from 124 last October. In Santa Clara County the number of price cuts rose six-fold to 818 in October 2018. The decline in technology stocks is an important factor. Tracy McLaughlin, a real estate agent in Marin County and Natalie Kitchen, a Realtor in San Francisco told Bloomberg that the decline in tech stocks were to blame. As Kitchen said, “I think it’s more about that feeling of generally being poorer than you thought you were.”

It’s possible, then, that Wall Street’s pessimism could trickle down into Pacific Heights and the West Village, and, from there, out onto “Main Street, USA.”

But it is also possible that the market will regain its footing, and find a way out of the deep, dank depths its fallen into.

U.S. Stocks Just Erased All Their 2018 Gains. Here’s Why.