The following commentary was originally sent to Action Alerts PLUS subscribers on Dec. 3, 2015, at 6:03 p.m. ET.
Make no mistake about it, Thursday was painful. After enjoying a two-month honeymoon that saw the S&P 500 rise nearly 12% from its late September lows, the market smacked investors across the face, with both the S&P and Dow Jones Industrial Average dropping 1.4% and turning negative for the year. The former suffered its biggest daily decline since September, while the Nasdaq Composite ended the session down 86 points, or 1.7%.
So what happened? Let's break it down into several components.
First, the European Central Bank, led by Mario Draghi, laid out policy changes -- including a further rate cut and an extension of its bond-buying program -- that investors perceived as being far less aggressive than many had expected. (As John Brady of R.J. O'Brien put it, "Draghi decided to leave the bazooka at home and he brought a squirt gun.") The news sent European stocks into a tailspin, with the Stoxx Europe 600 falling more than 3% and prompting heavy short-covering in the euro; it spiked more than 3% against the dollar, marking its biggest one-day move in more than six years. Many believe that as investors sold the dollar, they also sold in spades dollar-denominated assets, including U.S. bonds as well as equities.
Second, in her public testimony to Congress, Federal Reserve Chair Janet Yellen effectively committed to a December rate hike. Unless Friday's jobs number comes in exceptionally below expectations, we can all but expect the Fed to raise rates in its next meeting.
Third, domestic data were disappointing, with durable goods, ISM services and factory orders all coming in lower than expected.
Finally, there is no question markets were rattled by the mass shootings in San Bernardino, Calif., which left 14 dead and 21 wounded, with the motive still unknown.
Selling pressure was largely concentrated around this year's popular bets, including biotech and a pocket of retail.
Within the Action Alerts PLUS portfolio, we were disappointed to see Starwood Hotels (HOT) fall to $69, as we believe this undervalues the risk/reward setup. We are glad we did not buy WhiteWave Foods (WWAV) into the selloff over the past month, as diminished takeover hopes and a broad-based beating of high-multiple retail names has led shares down a rabbit hole. We sense a bottoming is on the horizon, but would stay put for now. Regarding Thermo Fisher (TMO) and Biogen (BIIB), while we continue to stand behind both names, we recognize the health care sector as a whole is at the mercy of vicious selling pressure.
On the positive side, we were happy to see EOG Resources (EOG), Panera Bread (PNRA), Costco (COST), Target (TGT) and Twitter (TWTR) outperform and we see further upside for all but the latter, which we rate as a Three.