The Dow-Jones Industrial Average is in correction territory, down nearly 10% from its January peak, because there’s no particular reason to buy any sector of the market. Several problems plague the tech sector, of which the most threatening in the long-term is a disruption of the global supply chain due to protectionism.
China’s response to the ban on purchases of American chips by ZTE is to engineer a global glut of semiconductors — not because China wants to start a price war, but because the threat of a cutoff of US components has triggered a massive, spare-no-expense response by the Chinese government to accelerate domestic production. The semiconductor sector has underperformed the broad market, down by 15% since its March 3 peak.
The traditional defensive stocks have done miserably. Consumer staples have lost more than 17% since their January 26 high point, thanks in large part to Amazon and other online shoppers: Rather than buy high-priced name brands from Johnson and Johnson, Proctor and Gamble, Heinz or General Foods, consumers are buying off-brand equivalents at much lower prices.
Industrials, led by the automakers, have been in free fall due to unexpectedly low auto sales. The sector is down 12.5% from the January 26 high water mark, and the worst performers are down more than 20% (including market leaders like 3M, Deere, Cummins, Illinois Tool and Parker-Hannifin).
None of this suggests a buoyant consumer sector or aggressive capital investment in the wake of the Trump tax cuts. Amazon is still 12.5% higher than it was on January 26 and up 35% year to date, while Netflix is up by 61%. Facebook is down only 2.39% year-to-date. The software monopolies are still making money, and destroying value around them (as Amazon does in the case of retail and consumer staples). Profits remain strong but they don’t look strong going forward, so equity markets will continue to struggle.