This was the worst one-day sell-off for US stocks since February. For much of the day, bonds sold off as well but, by the end of the day, investors fled to the perceived safety of US Treasuries, sending yields lower.
What drove the sell-off?
Stocks began losing ground last week as the yield on the 10-year US Treasury spiked, helped by comments from US Federal Reserve (Fed) Chair Jay Powell, who suggested that the Fed could raise rates significantly before finishing its rate hike cycle. Also placing downward pressure on Treasury prices has been balance sheet normalization as well as higher debt issuance as a result of the US government running a larger deficit. As we have seen before, any significant increase in the 10-year yield typically results in a re-rating of stocks. Less than a month ago, the yield on the 10-year was 2.991% but since then it has risen rapidly, rising above 3.2% in the past week.1 Given that the tech sector has posted such strong returns in the past several years, it should not come as a surprise that it experienced a more severe re-rating than other sectors.
However, I also believe there is another reason for the sell-off: the growing trade wars. At times in the past year, protectionist threats and actions have sent stocks modestly downward, but investors have been all too willing to believe the threat has passed at the first sign of an abatement in trade drama. For example, after trade worries put downward pressure on stocks earlier this year, Chinese President Xi Jinping’s conciliatory speech at the Boao Forum in March was all investors needed to hear to send stocks upward. Realistically, this asymmetric reaction to trade developments — i.e., overreaction to positive trade news and underreaction to negative trade news — was not