Market sell-off continues

What’s happening according to AllianceBernstein

The market sell-off continued early this week, with the S&P 500 down 8.7% from its recent peak and the NASDAQ down 12.4%.

We attribute the sell-off to four main forces:

1. The announcement of tariffs against Canada and Mexico raised concerns about corporate earnings for the year, potentially shaving off anywhere from two to eight percentage points of expected earnings growth depending on their breadth and duration, when combined with other tariff proposals
2. The deferment of those tariffs, followed by their reintroduction and rapid re-deferment raised more general concerns about policy uncertainty and businesses’ ability to make plans for capital expenditures and hiring with the economic policy backdrop becoming less stable. The more risk and uncertainty there is, the higher a risk premium the market has to price in, which means a lower multiple
3. Levered equity long/short hedge funds have been de-risking, causing stocks which had become more crowded to move up or down not based on fundamentals, but rather based on repositioning—setting off a cycle of technical, positioning-driven market moves
4. Monday’s sell-off in particular appears directly related to comments by President Trump over the weekend describing the risk of a recession this year by saying, “There is a period of transition, because what we’re doing is very big.” The markets seem to be interpreting that as a reduced chance that he’ll change the policy course if the stock market sells off (aka, the “Trump put”), although that is seemingly what he did last week in reversing himself on Canada/Mexico tariffs again

Portfolio implications

The value of diversification should not be underestimated this year. While the S&P 500 is down 4.5% year-to-date, municipal bonds are up 1.5% and developed international stocks are up 9.1%. Diversification is working.*

Final thoughts

While we cannot forecast what news will come out of Washington, DC next—whether on tariffs, the budget, geopolitical affairs, or other policies—we can strive to serve our clients’ needs in the face of whatever comes. Diversification* is one of our most critical tools in those efforts and we lean on it strongly. In the current environment, that approach has benefited our clients and, as we face ongoing news flow from DC and around the world, we expect it to continue to do so.