• Volatility has officially returned to the markets with five or the last six trading days resulting in at least a 1% move in the S&P500. This has led many hedge funds, which as a group have held a third of their portfolio in expensive tech stocks according to Goldman Sachs, to rapidly reduce their exposure. If this de-risk attitude is sustained it could derail the usual end of year market rally. In all but three Decembers since the financial crisis the market has risen.
• The bullish outlook for the housing market is based on the continued lack of supply. For example, annual construction starts have been less than 750K for the past decade (compared to 1.6 million from 2004-2006) and existing home inventories remain at historically low levels at a time when millennials look to be home buyers. The counter argument, however, often points out that the US population will only growth 4% this decade (vs. 7.4% from 2010-20) and if interest rates rise the 30 year mortgage will become less attractive.
• This past week further solidified the decoupling of Chinese companies from US markets. On Thursday the SEC formalized the process that would force Chinese companies to be expelled if they fail to hand over their audits. Then on Friday Didi Global announced it would delist it ADRs from the NYSE. The move led the stocks of other large US-listed Chinese companies to fall. Alibaba fell 8.2%, reducing its market value by around $27 billion.
• The index of small-cap growth companies (ticker: IWO) has now dropped 13% since it hit its November 8^th high. This was largely driven by the Fed’s plan to end its $80 billion monthly bond buying program. Yet, some investors believe there is now a buying opportunity since the index is cheaper, trading at 43.3x forward earnings (vs. 51.9x on Nov 8), and the average expected per share earnings growth rate of the index over the next two years is 45%.