New Economic Worries Drive a Rotational Market Correction
The correction that started with valuation concerns is now shifting to broader economic worries. Here's the good news, though.
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A rotational market correction continues for the third day on Tuesday morning. A variety of issues are hitting the market and providing fresh reasons for selling various sectors.
The pullback was initially triggered last week when Walmart WMT issued a weak earnings report and warned about slowing growth. Like many other leading names, Walmart was selling at an elevated valuation and was hit hard when the P/E ratio was adjusted to account for the slowing growth. This then spilled over into other high P/E growth names, primarily in the technology sector.
The Magnificent Seven MAGS names, which have been struggling for a while, were caught in the growth selloff, and now the only chart in the group that looks OK is Apple AAPL. Even Meta META, which enjoyed a very strong winning streak since mid-January, has fallen sharply and given back more than $80 in gains as it tries to find support around $660.
Other areas of concern have also come to the forefront as growth stocks have corrected. On Tuesday morning there are growing concerns about tariffs on Canada and Mexico and new restrictions on Chinese semiconductors. The semiconductor sector SMH is down another 1% after dropping 2.6% on Monday.
Meanwhile, concerns are increasing about economic growth, which is driving down interest rates as money flows into the safety of bonds. The 20+ Year Treasury Bond ETF TLT is now at its highest level since December 17 as the market grows more optimistic that a slowing economy will allow the Fed to cut interest rates as early as May or June.
What is most notable about the corrective action is that it is rotational, with different groups being hit each day. The Bitcoin-related group is the latest to suffer on Tuesday morning. iShares Bitcoin Trust ETF IBIT is down 6.5%, and Coinbase Global COIN is off 5.6% in premarket trading.
Market breadth has not been terrible during this correction as the selling is rotating each day to different areas. Market leadership is shifting, but it is extremely messy, and there isn’t any clarity at this point about what sectors may become the next leaders. It is going to take a while for the market to sort out all of the different issues that are hitting, so it is particularly important to protect capital and be highly selective with any new purchases.
The good news is that a new crop of opportunities will eventually emerge from this mess. However, it will take some time, and extreme vigilance is necessary.
At the time of publication, Rev Shark had no positions in any securities mentioned.
