US stock indices were due a sell-off, and now they’re getting one.
The Dow Jones Industrial Average topped out in late January, a couple of weeks before the S&P 500 and the NASDAQ 100 began their own descent from their respective all-time highs.
While the Dow has not, at the time of writing, fallen into ‘correction territory’, defined as a 10% fall from recent highs, the S&P and NASDAQ both have.
In fact, the NASDAQ was down around 14% at one stage and looked as if it was on its way to a full-blown ‘bear market’ – a 20% decline from recent highs.
There are several factors blamed for the loss of risk sentiment, with President Trump’s imposition of tariffs on the US’s major trading partners being the most obvious one.
The timing is certainly about right.
Mr Trump was inaugurated on 20th January.
He immediately set about signing a pile of executive orders, following a speech that provided a road map for his administration’s direction of travel.
The announcement of trade tariffs followed at the beginning of February, initially targeting Mexico, Canada, and China, but with threats to other countries and Europe as well.
Trump had talked about implementing tariffs while on the campaign trail, and he had used them against China during his first term as president.
But most observers were convinced that such levies were nothing more than a blunt negotiating tool that President Trump would use to bend other countries to his will.
This had largely been the case during his first term when tariffs were threatened, withdrawn, watered down and so full of exemptions that they did relatively little harm to trade.
And so it seemed this time as well, as the president imposed, and quickly postponed, levies on Canada and Mexico.
But six weeks on, investors are struggling to deal with the uncertainty and complexity of Trump’s scattergun approach to tariffs.
And it feels as if this uncertainty has helped trigger the pullback seen across equities, particularly in the big tech, highly valued market leaders as typified by constituents of the ‘Magnificent Seven’.
And it’s not just high valuations which have been a concern for some analysts. Just as important is the concentration of risk in a very small sliver of the market.
In mid-2024, the stocks in the ‘Magnificent Seven’ accounted for just under 35% of the total value of the S&P 500 by market capitalisation.
Even now, after the recent blood-letting, along with a 50% fall in Tesla in three months, and a 24% drop in NVIDIA since January, the ‘Mag 7’ still makes up 30% of the total valuation of the S&P 500.
But could this be enough to reset the indices?
Investors have become so used to ‘buying the dip’.
And no wonder, since it has been a highly profitable strategy since the latest leg of this bull run began in October 2022.
Can it work this time as well?
So much depends on investor sentiment. US equities soared on Trump’s election victory in early November.
Investors rushed to increase their market exposure on the prospect of an administration led by a man who really understood business; one who was promising deregulation and lower taxes.
Yet could it turn out that Trump’s inauguration pretty much rang the bell to signal the market top?
Attitudes appear to be changing.
And investors have become increasingly worried that Trump 2.0 is far less concerned about stock market performance than his previous iteration.
(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)
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