Tech Concerns Remain
Domestic stocks recovered some of the previous week’s steep losses last week and recorded solid gains. The week was most notable for a sell-off in high-valuation tech companies, however, which caused the Nasdaq to lag the other benchmarks. A steep drop in Amazon shares caused the consumer discretionary sector to join tech and energy stocks among the week’s laggards in the S&P 500. Typically defensive consumer staples stocks performed well, on the other hand, as did real estate and utilities, whose heavy dividends became more attractive as long-term bond yields decreased.
Last week got off to a very strong start as the trade war fears that led to much of the previous week’s volatility appeared to fade somewhat. Traders were encouraged by China’s decision — for the time being, at least — not to establish retaliatory tariffs on its imports of U.S. soybeans and commercial aircraft. Reports of talks between Chinese and U.S. officials on opening the Chinese market to U.S. goods and protecting U.S. firms’ intellectual property rights were also encouraging. Monday saw the S&P 500 notch its best daily gain since August 2015, even though trading volumes were disappointing, perhaps reflecting a lack of broad conviction in the rally.
The market gave back a good portion of its gains on Tuesday with a late-day sell-off in tech. The primary culprit appeared to be a report that the Trump administration was considering a crackdown in Chinese investments in U.S. firms with tech deemed necessary to national security. Speculation has grown that the administration is pushing back against the Chinese government’s plans to dominate emerging tech and industrials, such as artificial intelligence.
Other factors also contributed to volatility in tech-related shares throughout last week. Worries about the safety of self-driving cars following a fatal pedestrian accident the previous week caused semiconductor maker Nvidia to announce that it was suspending its own experiments with the technology, leading to a sharp drop in the shares of one of 2017’s top market performers. Tesla shares also sank as investors reacted to a fatal crash in one its cars, although it remained unclear whether the vehicle’s self-driving mode had been engaged at the time.
Meanwhile, controversy over the use of customer data continued to weigh on Facebook shares, particularly after the announcement of a Federal Trade Commission investigation into the issue — a contagion that seemed to spread to Twitter. Amazon shares suffered from worries about antitrust or other regulatory action against the company following a report on Wednesday that President Trump was “obsessed” with the company. Tech shares got some relief on Thursday, as Microsoft stock rose following reports of a coming reorganization at the company. However, this confluence of problems has fed a media narrative that the tech industry is headed for a sea-change moment where investor cash dries up and consumer interest cools. This week, Andrew Ross Sorkin of The New York Times asked if we are “witnessing the end of a tech boom.”
Volatility in stocks last week seemed to cause investors to seek a haven in the U.S. Treasury market, even though The U.S. GDP grew at a 2.9 percent annual rate in the last quarter of 2017, 0.2 more than expected and up from the 2.5 percent annual growth reported in the third quarter. The yield on the benchmark 10-year U.S. Treasury note reached its lowest level since early February.
The leading European stock indexes regained some ground last week but finished the month and the first quarter under water. The UK blue chip FTSE 100 index led the way, picking up just over 2 percent, while the pan-European STOXX 600, German DAX, and French CAC 40 each added more than 1 percent. As in the U.S., a reduction in concerns about a global trade war helped fuel the recovery.
In Asia, the trade-related concerns between the U.S. and China were top of mind. The announced U.S. measures led China promptly to announce (but not yet implement) retaliatory tariffs of its own. Despite the war of words, the risk of a full-blown U.S.-China trade war is remote, according to many analysts, and Chinese stocks rallied as a consequence. Japanese stocks also rallied last week, recovering some of their losses from the previous week. However, all of the major Japanese market indexes remain substantially in the red YTD.