Why Are Stocks Selling Off? Three Factors Are Weighing on the Market -- ICYMI

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In the middle of a meltup, investors started selling. Concern about the coronavirus trickled back. Valuations are high. Outsized losses in big tech weighed on the broader market.

The S&P 500 on Thursday fell as much as 1%, with the other two major indexes down significantly as well.

To start 2020, the S&P 500 is still up 4.2%, continuing 2019's 28% gain, partly on the back of low interest rates and what investors expect will be a reacceleration in U.S. economic growth.

Unlike the end of Q4, the 2020 rally has seen defensive sectors like utilities post outsized gains, while cyclicals like industrials, energy and financials have lagged.

The three-month and 10-year treasury securities are again inverted, with the shorter yield at 1.58%, 0.5 percentage point above the longer one.

Coronavirus Concern Return

One driver behind the bounceback in stocks in the past month has been fading concern that the coronavirus will spread widely.

But with the disease now having killed more than 2,300 people and infected nearly 76,000, that concern is back. More U.S. companies are warning that the virus will hurt near-term revenue and profit.

"Fears that the impact of the coronavirus will be more widespread than previously believed are weighing on market sentiment today," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

Consumer-products icon Procter & Gamble PG says it expects a "material impact" from the coronavirus. Management said in an SEC 8-K that the current quarter is seeing drastically slower in-store for traffic and volumes, and that production has also slowed significantly. Limited travel is also weighting on sales, the company said. The company sees roughly 8% of its yearly sales from mainland China, according to estimates from FactSet.

P&G did affirm its current fiscal year sales guidance of $70.39 billion to $71.07 billion. The stock rose 0.66% to $126.66 a share.

Still, this is a signal that other companies may also be feeling the pain.

On Semiconductor, ON a chipmaker expected to supply 5G-device producers, fell 1.2% as analysts at Needham pared their price target to $38 from $30. Management told the firm that it's facing"manufacturing production challenges,"according to senior analyst Rajvindra Gill.

Gill said ON is seeing chip orders pushed out to later quarters, a trend similar to what Apple AAPL is dealing with. This is positive news for ON's 2020, but out of caution, Gill lowered his 2020 revenue and earnings-per-share estimates to $5.6 billion and $1.12. His previous estimates were $5.79 billion and $1.35.

While production halts in China have threatened to constrict American imports, many U.S. manufacturers have been able to rely on existing inventory to meet demand. But if Chinese production continues to slow from here, the impact could eat into U.S. imports and therefore sales.

"For U.S. companies that rely on intermediate goods originating from China, product shortages could hamstring their efforts to conduct business-as-usual. For now, companies will make use of existing inventories, but such buffers are dwindling fast,"said Jason Pride, chief investment officer of private wealth at Glenmede.

Big Tech Weighing

Strip out the impact of the losses in big tech, and we probably have a more muted sell-off.

While the S&P 500 fell 0.45% in late afternoon trading, Facebook FB, Amazon AMZN, Apple, Netflix NFLX, Alphabet's Google GOOGL and Microsoft MSFT, which combine for a market capitalization of $5.7 trillion, all fell more. 

In that order, those stocks fell 1.01%, 1.01%, 1.04%, 0.48%, 0.66% and 1.85%. 

Valuations

And where valuations are concerned, the average stock is trading at 18.8 times next year's earnings, late in the economic cycle. The average forward multiple on the index in the past 10 years is 15, so the current premium is about 23%.

Any negative change to economic forecasts makes the market wary and stock prices may react accordingly.