It was another rough week for the markets. Through the Friday close, the Dow fell 3.0%, the S&P lost 3.9%, and the Nasdaq was down 3.8%. Bonds prices rose (and yields fell) as investors moved into safer investments. Gold continues to do well, up 0.8%. Oil prices keep moving lower, off 2.2% to close at $67.62 per barrel. The international Brent oil, which is used for much of the gas here on the East coast, closed down to $77.73.
Ah, October. How we loathe thee. Historically the most volatile month of the year, October continues to live up to its reputation as another rough week put stocks lower for the year. Let’s take a look at a longer view of the market:
So what’s going on with the stock market?
There were a few things this week that we will get to, but everything now has to be looked at through the prism of the Fed and their stimulus program.
For years they embarked on the biggest stimulus program in the history of the world. They lowered interest rates to 0% and printed trillions to stimulate the economy. This acted like a pain killer for the market, where bad news was ignored.
Now they are pulling back on that stimulus and the pain killer is wearing off. Fed chairman Powell has pointed to the strong economy and indicated that it doesn’t need the pain killer anymore. But like an addict, coming off a drug is painful. Investors are essentially saying, “Why don’t you slow down a bit, we’re starting to feel a little pain?” Chairman Powell, however, seems undeterred.
This was a problem of getting into such a massive stimulus in the first place – it is very difficult to get out cleanly. We’ve shared this concern in our investment strategy section below for years now. The economy may be on solid footing, but since the stimulus pushed up stock prices, will its removal cause stock prices to fall? We’re starting to see that now.
With that pain killer wearing off, investors are getting more jittery and looking for a reason to sell after the tremendous run we’ve seen over the years. Bad news over the last few weeks has provided that opportunity, did a few stories this week.
First, geopolitical issues remain as our trade fight with China doesn’t show any signs of letting up. This week, a Chinese official said that their country doesn’t fear a trade war. That was enough to rattle the market.
Also, this week was the busiest for corporate earnings this quarter and some red flags were raised.
Earnings actually look pretty solid. According to Factset, almost half of the companies in the S&P 500 have reported results and earnings are growing 22.5%. Revenue, what a company earned through sales, is on pace to rise 7.6%.
These are solid numbers. However, they aren’t as solid as the last several quarters – revenue is at the lowest level in the last four quarters.
There were a few things this week that we will get to, but everything now has to be looked at through the prism of the Fed and their stimulus program.
For years they embarked on the biggest stimulus program in the history of the world. They lowered interest rates to 0% and printed trillions to stimulate the economy. This acted like a pain killer for the market, where bad news was ignored.
Now they are pulling back on that stimulus and the pain killer is wearing off. Fed chairman Powell has pointed to the strong economy and indicated that it doesn’t need the pain killer anymore. But like an addict, coming off a drug is painful. Investors are essentially saying, “Why don’t you slow down a bit, we’re starting to feel a little pain?” Chairman Powell, however, seems undeterred.
This was a problem of getting into such a massive stimulus in the first place – it is very difficult to get out cleanly. We’ve shared this concern in our investment strategy section below for years now. The economy may be on solid footing, but since the stimulus pushed up stock prices, will its removal cause stock prices to fall? We’re starting to see that now.
With that pain killer wearing off, investors are getting more jittery and looking for a reason to sell after the tremendous run we’ve seen over the years. Bad news over the last few weeks has provided that opportunity, did a few stories this week.
First, geopolitical issues remain as our trade fight with China doesn’t show any signs of letting up. This week, a Chinese official said that their country doesn’t fear a trade war. That was enough to rattle the market.
Also, this week was the busiest for corporate earnings this quarter and some red flags were raised.
Earnings actually look pretty solid. According to Factset, almost half of the companies in the S&P 500 have reported results and earnings are growing 22.5%. Revenue, what a company earned through sales, is on pace to rise 7.6%.
These are solid numbers. However, they aren’t as solid as the last several quarters – revenue is at the lowest level in the last four quarters.
The forecasts for next year from several large companies also worried investors. Companies will continue to grow – that’s not a concern – just at a pace that is a bit slower than we are currently experiencing. Plus they are facing higher costs, which will also eat into earnings.
This bit of bad news gave investors a reason to sell.
Switching gears, economic data continues to look solid (and reinforces the idea that the Fed will keep pulling back on its stimulus). The big report came on Friday with the GDP figure, which came in a bit stronger than expected.
Switching gears, economic data continues to look solid (and reinforces the idea that the Fed will keep pulling back on its stimulus). The big report came on Friday with the GDP figure, which came in a bit stronger than expected.
Note that since 2016, the GDP has been steadily higher instead of wide fluctuations like before. This indicates a healthy economy.
We also had good news on durable goods, which showed a nice gain over the previous month. Pending home sales were higher although the pace of new home sales was lower. Home prices continue to rise and outpace incomes, which could be a problem down the road.
We also had good news on durable goods, which showed a nice gain over the previous month. Pending home sales were higher although the pace of new home sales was lower. Home prices continue to rise and outpace incomes, which could be a problem down the road.
Next Week
Next week will be another busy one. Corporate earnings are past their peak, but we’ll still get a lot of reports. As for economic data, we’ll get info on the strength of employment this month, the manufacturing sector, and personal income and spending. The volatility doesn’t show any signs of letting up.
Investment Strategy
Stocks are very oversold (or cheap) here on a short term basis. We aren’t jumping in with both feet, but it looks like a good time for some nibbling. We aren’t seeing many of our indicators improve and we’d like to see that change before we get too excited on the market.
Next week will be another busy one. Corporate earnings are past their peak, but we’ll still get a lot of reports. As for economic data, we’ll get info on the strength of employment this month, the manufacturing sector, and personal income and spending. The volatility doesn’t show any signs of letting up.
Investment Strategy
Stocks are very oversold (or cheap) here on a short term basis. We aren’t jumping in with both feet, but it looks like a good time for some nibbling. We aren’t seeing many of our indicators improve and we’d like to see that change before we get too excited on the market.
There is no change in our longer term forecast, which remains difficult to predict. As mentioned above, fundamentals are still very good with pro-business policies out of Washington providing a solid tailwind. However, as we also mentioned above, rising interest rates have historically pulled markets lower. It’s tough to say where we think the market will go in the long run.
Bonds are also volatile at this time. Yields are on the high side (and prices on the low side), but we don’t think prices will fall much further and continue to trade in the range they have been in for the last several months.
As for the rest of the portfolio, bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates do rise.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical issues as a flight to safety.
Finally, in international stocks, we prefer developed markets to emerging ones at this time.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
Bonds are also volatile at this time. Yields are on the high side (and prices on the low side), but we don’t think prices will fall much further and continue to trade in the range they have been in for the last several months.
As for the rest of the portfolio, bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates do rise.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical issues as a flight to safety.
Finally, in international stocks, we prefer developed markets to emerging ones at this time.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
