Good morning investors,
Volatility is the price of admission, and Thursday delivered a harsh reminder with the S&P 500 and Dow each plunging 1.7% while the Nasdaq cratered 2.3%. The risk-off rout sent Bitcoin below $100,000 as Fed hawks spooked markets and recession fears grip lower-income households. Applied Materials fell 4% despite beats, warning of China weakness. But while everyone panics about Fed odds dropping to 52%, quality names getting cheaper create the opportunities I've been waiting for in this November chop.
Opening Bell: Fear Accelerates
Dow ($DIA ( ▲ 1.36% )) futures plunge 276 points with S&P ($SPY ( ▲ 0.23% )) futures down 0.8% and Nasdaq ($QQQ ( ▼ 0.32% )) futures falling 1.3% as tech carnage continues. Nvidia and AMD each drop 3% premarket while Palantir and Tesla slide 4%. The Technology Select Sector ETF down over 1% signals broad tech weakness, not isolated problems.
Thursday marked the worst day since October 10, with the Dow erasing Wednesday's 48,000 celebration in one session. The Nasdaq's 2.3% plunge puts it on track to snap a seven-week winning streak. Bitcoin falling another 2% shows risk-off sentiment spreading beyond equities into all speculative assets.
The K-Shaped Recession Reality
Mohamed El-Erian's warning at the Yahoo Finance Invest Conference deserves attention: lower-income households are already in recession-like conditions while the wealthy drive consumption. October layoffs hit 150,000, the worst in 20 years, while ADP showed just 42,000 job gains. Without stimulus cushions this time, the affordability crisis creates real economic danger.
This isn't abstract, when lower-income households stop spending because they can't, not won't, it contaminates upward. The K-shaped recovery we've discussed for months is becoming a K-shaped recession at the bottom. Healthcare and discount retailers benefit while luxury and discretionary suffer. Position accordingly.
Merck's $9.2B Cidara Acquisition
Merck acquiring Cidara Therapeutics for $9.2 billion gains access to CD388, a potential single-dose universal flu prevention drug. This follows July's $10 billion Verona purchase and continues Merck's aggressive diversification beyond Keytruda before patents expire.
The deal validates my healthcare thesis. Big pharma sitting on massive cash hoards will keep acquiring innovation at premium prices. With Keytruda generating $25 billion annually, Merck can afford strategic overpays. Healthcare M&A acceleration supports the sector's outperformance potential.
Applied Materials' China Warning
Applied Materials beat Q4 with $2.17 EPS versus $2.09 expected on $6.8 billion revenue, but shares fell 4% on China concerns. The company expects China equipment spending to fall in 2026 as export controls tighten, with China revenue reverting from 40% to mid-20% of total.
CEO Gary Dickerson's frustration was palpable: "Non-U.S. equipment companies don't have the same restrictions" while Chinese customers "would rather buy from Applied." This competitive disadvantage from unilateral U.S. restrictions creates long-term headwinds. The stock's weakness despite beats shows how China exposure has become toxic.
Fed Hawks Kill December Hopes
December rate cut odds collapsed from 95% a month ago to 52% as hawks dominate the narrative. Former Fed Vice Chair Lael Brainard's warning about cracks "under the hood" masked by AI fell on deaf ears. The Fed seems willing to risk recession over inflation that's already moderating.
But here's the truth: this rally was never solely about rate cuts. AI investment, productivity gains, and earnings growth drive markets, not 25 basis points. The Fed obsession creates volatility but doesn't change structural trends. Use the fear to buy quality.
StubHub's Post-IPO Reality
StubHub shares crashed 18% after refusing to provide Q4 guidance despite beating Q2 revenue expectations. The $1.33 billion net loss from stock compensation shocked investors just months after September's IPO. This is why I avoid recent IPOs - the cleanup from going public creates headline risk.
The ticket resale business remains solid but management credibility took a hit. No guidance suggests either extreme uncertainty or bad news coming. Either way, stay away until clarity emerges.
November Opportunities Emerge
Thursday's carnage is creating the exact opportunities I've been waiting for. Nvidia down from recent highs, quality tech getting cheaper, and healthcare holding relatively better all align with my positioning preferences. This is November chop, not trend reversal.
Yes, the labor market shows real stress for lower earners. Yes, Fed hawks have gone too far. But AI investment continues accelerating, earnings remain strong outside pockets of weakness, and year-end dynamics haven't changed. Fund managers trailing benchmarks by 80% must chase performance.
Final Thought
Volatility is indeed the price of admission, and Thursday extracted full payment. But perspective matters: we're still near all-time highs despite the longest shutdown ever, missing economic data, and Fed hawks gone wild. The underlying trends haven't broken, yet.
The K-shaped economy creates winners and losers and investors have to position for both. Healthcare and financials offer defensive growth while tech selloffs create entry points in quality names. People are not buying stocks for solely rate cuts, they are buying them for AI transformation, productivity gains, and secular growth trends that transcend Fed meetings.
This November chop was predictable and healthy. The Dow racing from 47,000 to 48,000 in 13 days needed consolidation. The Nasdaq up seven straight weeks begged for profit-taking. Now we're getting it, creating opportunities for patient capital.
Use this fear to build positions in quality names. Amazon and Google getting cheaper on Fed fears is a gift. Healthcare leaders like UnitedHealth and Eli Lilly offering defensive growth look attractive. Small caps could explode higher if sentiment shifts.
We're weeks away from year-end rally dynamics kicking in. Nvidia reports Tuesday. Thanksgiving seasonality approaches. Tax-loss selling creates January effect opportunities. The setup improves while prices get better.
Stay disciplined through this volatility. The best gains come to those who buy fear and sell greed. Right now, fear dominates, creating opportunity.
Have a great weekend, and as always, feel free to reach out with questions about navigating these volatile markets.
Best regards,
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.