Can Investors Expect a ‘Black Monday’ Tomorrow?


Aug. 24 2019, Updated 7:40 p.m. ET

We know that the Dow Jones Industrial Index (DJIA) fell 623 points or 2.4% on August 23, 2019. Investors lost significant wealth as the S&P 500 ETF (SPY) fell 2.6% while other indices like the Technology Select Sector SPDR Fund ETF (XLK) and semiconductor ETFs, such as for VanEck Ventors (SMH) and iShares PHLX (SOXX), were down by 3.3%, 4.1%, and 4.4%, respectively.

China’s retaliatory tariffs that it announced on Friday in part caused this market carnage. This CNN report states, China threatened to impose additional tariffs between 5% and 10% on US goods that are worth $75 billion. The products likely to be hit by these tariffs will be from the agriculture, automobile, and oil industries.

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A full-blown trade war in the cards

Soon after China’s announcement, President Donald Trump held a conference to discuss the tariff retaliation. As expected, President Trump did not hold back. He stated that the United States will further raise tariffs from 25% to 30% on Chinese goods worth $250 billion.

Trump did not stop here. According to this Business Insider report, he also threatened to increase tariffs from 10% to 15% on Chinese goods worth $300 billion that are set to start on September 1, 2019. This should concern tech and semiconductor stock investors.

Trump told reporters, “We’re having a little spat with China, and we’ll win it. We put a lot of tariffs on China today, as you know. They put some on us; we put a lot on them. We’re up to about $550 billion.  They’ve been hitting us for many, many years — for over $500 billion a year — taking out of our country much more than $500 billion a year. So, we want that stopped.”

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Markets are volatile while investors remain wary

Will China retaliate further? How will Friday’s escalation impact the market? Investors are already in panic mode driven by a global economic slowdown and fears on a looming recession. The markets are likely to open in the red on Monday. Thus, the recent announcements might lead to a sell-off and send indices and stocks even lower.

With the 2020 presidential elections just a year away, Trump is unlikely to take a backward step. He doesn’t want to look like he’s losing this trade war. He will put on an aggressive stance. Have investors had enough of market uncertainty and will they start pulling out money from the stock market?

Tech and semiconductor stocks like Apple (AAPL), Micron (MU), Intel (INTC), NVIDIA (NVDA), Applied Materials (AMAT), and others have significant exposure to China. Investors should expect these stocks to trade lower on Monday.

How has the S&P 500 performed in a recession?

The S&P 500 ETF is down 4.2% in August 2019. Despite the recent pullback, the ETF has gained 15% year-to-date. But, the ETF has gained just 8% since the start of 2018 and has been impacted whenever the trade war has escalated. In addition, the ETF is trading 6% below its all-time high.

Historically, S&P 500 ETF investors lost 45% during the dot-com bubble. Also, the 2008 recession saw investor wealth decline by 50%. While the recession might still be a year away, there are several indicators of an economic downturn that will keep investors on their toes.

Tech companies burn investor wealth in recessions

But, tech stocks outperform the broader indices in a bull run. Also, they burn investors wealth significantly in a downturn. Several stocks like ServiceNow (NOW), Roku (ROKU), Okta (OKTA), Twilio (TWLO), and Splunk Technology (SPLK) are trading at premium valuations and will lose significant value in a recessionary environment.

For now, investors need to brace for absolute carnage on Monday, August 26.


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