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The markets were simply overwhelmed with uncertainty over the last few trading days and uncertainty is just another name for RISK.  This time the factors weren’t just geo-political or from monetary forces but largely involved the Tech sector, which kept the Nasdaq index under serious pressure for the first time in a while.

What factors are we alluding to?  Well, the more traditional issues such as interest rate pressure was one of them, however probably not the most noteworthy, as despite the new Fed Chair jawboning as to multiple hike throughout the year (which are completely warranted and overdue by about 3 years), the longer end of the Treasury curve actually trimmed a few basis points in yields.  The transparency also reduced risk in this area somewhat.

The next factor which sent shockwaves through the Tech sector, was the data breach in the social media realm and the forces of data mining coming into play.  From the Doc’s perspective, this is simply no surprise, except that the breach was exposed to many.  The Digital era involves data being created and being leveraged in many, many ways throughout industry.  However privacy needs to be upheld and integrity as to the use of individual data must be adhered to.  Keep an eye out for other areas that may come under scrutiny in the data central world.

Finally, and perhaps the most noteworthy is the threat of trade tariffs imposed by the US.  Whether you agree with this policy or not, this adds significant uncertainty as to pricing and availability of products and services.  From a traditional economic perspective, some would argue that tariffs are not good, however in light of extreme global forces affecting US labor for decades, a strong argument for tariffs is well in place.

The bottom line…US equities have been simply well overvalued for a few years as zero interest rate policies globally funneled liquidity into this sector.  Zero interest rates also fueled significant venture funding of many start-up companies and promoted buy backs in large magnitude. The triple whammy we just explained could be the “black swan” that many had feared, however it is too early to tell.

As we mentioned above, 10 year yields have not yet breached 3%, so the interest rate factor is not an issue at the moment.  Keep an eye on any news on data issues that may arise in the Tech sector outside of the main players at the moment and most importantly, be wary of tariffs that may extend beyond China…..these factors would make the black swan make a nest for a while.

PS. That shiny stuff that no one likes to talk about may just be an interesting sector in the near to medium term.


Stephan Kudyba (MBA, PhD)                      THE MARKET DOCTOR


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