Morning Note

As I've expressed on recent video commentaries and in client meetings, the core adjustments we've made over the past several weeks have been primarily focused on adding to our defensive sector exposure (read consumer staples), raising our cash level and increasing the support mechanism expressed by our use of SP500 options... I.e., dialing back the portfolio's volatility a bit for what should be obvious reasons.

Now, you wouldn't necessarily know it by today's action. 

Although, that said, as I type we're capturing just over half of the SP500's decline, and only 31% of the Nasdaq's hit... Thing is, those two indices are down 1.87% and 3.70% respectively.. So, yes, we're definitely feeling it today.

The relief we're getting is coming from our increased cash level, healthcare, staples and of course our SP500 put options... But, oddly enough, gold is not providing the support one might anticipate given the action we're seeing across all asset classes; which has been largely the case the past several weeks.

I believe the following does a good job capturing what underlies these short-term dynamics, while putting it all in its proper long-term context: 

Tech Selloff Spills Into Gold*

Gold fell about 3% today, slipping below $3,900 and putting the metal on track for its weakest October in nearly two decades. The trigger wasn’t in the gold market. A sharply disappointing outlook from a major chipmaker set off a broad selloff in technology shares, and investors sold gold alongside it, likely to raise cash and cover losses elsewhere.

The equity damage was concentrated but wide-reaching. The S&P 500 fell nearly 2%, with technology down more than 5% and semiconductor names hit hardest. The selling extended overseas to markets most tied to the AI hardware supply chain, with Korea down sharply and emerging markets broadly lower. Small caps also lagged. Defensive sectors told the other side of the story: consumer staples, energy, health care and utilities all finished higher, helped in energy’s case by firmer oil prices. Bonds edged up as well. Investors weren’t fleeing stocks wholesale; they rotated out of crowded growth exposure and into areas with steadier earnings.

What stands out in gold is what didn’t move. Interest-rate expectations were essentially unchanged, and the dollar was flat to softer, conditions that normally support gold. The selling was uniform whether gold is priced in dollars, euros or yen. This was selling of the metal itself, driven by positioning and the need for liquidity, not by a change in the economic outlook.

That distinction matters. In recent weeks gold has traded less like a crisis hedge and more like a source of funds when riskier assets come under pressure. Near term, its path looks tied to whether the technology selloff stabilizes; when that pressure eased earlier this week, gold steadied with it.

The longer-term case is unchanged. Central banks, led by China, have been accelerating their purchases into this decline, and the fiscal backdrop that underpins our view remains in place.

On the technology side, today’s news points to strain in the AI spending cycle rather than a reversal. Signs that memory chip pricing is cooling are the development we are watching most closely.

With the midterm elections Tuesday and the October jobs report next Friday, we see no reason to act hastily. We’d rather let the selling run its course than step in front of it.

*The section titled Tech Selloff Spills Into Gold was prepared with AI assistance, yet expresses the macro and market views of PWA... Edited by Marty Mazorra, Chief Investment Officer.