@theMarket: The Market's Last Quarter
Today marks the end of the third quarter for stocks in 2018. But it is the fourth quarter that will determine what kind of year it will be. Let's place our bets.
First, we should look at what could go wrong over the next three months. Tariffs probably lead the list. More of them, (although the dollar amount is minimal in the scheme of global trade), would be bad for sentiment within the global stock markets. Mid-term elections are a toss-up, but simply not knowing the outcome I count as a negative. Quarterly earnings results might also hold some risk for investors. And finally, the latest investor sentiment readings (a contrary indicator) are as high as they were back in January before the stock market sell-off.
Since there is no way of knowing what our esteemed president will do on the trade front, let's simply acknowledge that risk and move on. Mid-term elections are also an unknown quantity, but my bet is that the Democrats will take the House, while the GOP will maybe hold the Senate if they're lucky. In all likelihood, after a bit of volatility, the markets will move on regardless of results.
As for earnings, they may be a bit different than the pleasant, upside surprises we have become used to over the last two years. Negative pre-announcements by various companies are ticking up. As of this week, 74 out of 98 S&P 500 companies, according to FactSet, have guided lower for the third quarter. So, what gives on the earnings front?
It is simply confirmation of what Federal Reserve Chairman Jerome Powell told us this week about Trump's trade war: "We've been hearing a rising chorus of concerns from businesses all over the country about disruption of supply chains and materials cost increases."
Bottom line: you don't actually need tariffs to be implemented to impact economic growth. Trump's constant threats and tweets about what he might or might not do on the trade front is creating an atmosphere of uncertainty. Corporations are becoming more cautious, guiding down expectations, and generally delaying expenditures until they see what happens.
Right now, investors expect third-quarter revenue growth to average 7 percent, while year-over-year earnings growth should come in at around 20 percent. Sounds good, doesn't it? But those numbers are down from second quarter results of 10 percent revenue gains and 25 percent earnings growth. The fourth quarter expectations are even lower with 6 percent revenue growth expected and 17 percent gains on the earnings front.
In the past, I have discussed the phenomena of "peak earnings" and how the wonderful results of the past few quarters have been artificially inflated by one-off events. The Republican tax cut giveaways to the nation's corporations were squandered on buy-backs of shares, increases in dividends, and mergers and acquisitions, but those effects are winding down.
Despite the effort in Congress this week to make those tax cuts permanent (in hopes of propping up the markets until after the mid-term elections), it is doubtful the Senate will go along with it. Adding another $750 billion or so to the $1.2 trillion it has already cost to cut taxes this year seems to be a "bridge too far" even for a party that has abandoned all semblance of fiscal integrity.
The U.S. Advisory Sentiment data now places the bulls at 60.6 percent, the most bulls counted since Jan. 18, 2018, and the seventh straight count above 55 percent. Usually, readings above 55 percent indicate caution. Over 60 percent signals elevated risk and the need to take defensive measures.
On the surface, all these arguments should set us up for a bear market in the last quarter. However, every one of these arguments has been around for at least the last three months and look what the markets have done. The Dow is up 9 percent, the S&P 500 Index up 7.5 percent, and NASDAQ gained 7.7 percent. Bottom line: the markets have shrugged off the negatives and moved higher. Why should the fourth quarter be any different?
@theMarket: September's stock market
Next week, Wall Street's big boys return to their offices. Campaigning for mid-term elections moves to the front burner, and tariff threats between the U.S. and China will likely escalate. Welcome to one of the worst months of the year for stocks.
It is true that both September and October tend to be negative months for the averages. Since 1945, the S&P 500 Index has, on average, lost 1 percent. In addition, it is a mid-term election year where Septembers are almost always rocky months for the market.
One could say that investors face an entire fall season of potential risks. Besides those I have already listed above, there will be the implementation of the new Iranian sanctions to contend with. And don't forget the recent free fall in so many emerging market currencies because of a stronger dollar and rising interest rates. We also have another budget deadline for Congress coming up. Last, but not least, are some events in Europe that bear watching.
The Italian budget, which is due at the end of September, could be contentious, since the budget promised to the voters may not be acceptable to the European Union. That could trigger another crisis of confidence like, but more serious, than, the recent troubles in Turkey. Brexit is another on-going concern, as is the outcome of our potential tariff talks with the European Union on autos.
All the above should maintain, or even elevate, that "wall of worry" that we have been living with since January. The good news: despite these concerns, the S&P 500 Index, along with most other averages, have reached record highs in the last week. The S&P is now up 9 percent for the year and NASDAQ is even higher.
Given these obstacles, readers should not be surprised that a growing chorus of market pundits are warning of a 5-7 percent decline in stocks "soon." OK, that's probably a fair guess, given the gains we've had, but so what. Do you really want to time the market here for a normal, and shallow pullback?
Statistically, while September and most of October are rocky months, the historical data says that whatever losses one incurs in the next two months, will be more than made up for by the end of the year. Are you good enough to guess the top, sell, and then get back in for a measly 5 percent? If you are, please manage my money.
Another thing with this "danger ahead" scenario is the number of people that are predicting this will happen at any moment. In the space of one week, my electrician, a dentist, two cab drivers and a librarian have all told me (and are convinced) that not only is the economy on its last legs, but the stock market was teetering on the edge of a precipice.
When I asked what led them to believe that this decline was imminent, they answered with conviction.
"They are all saying it."
I never did get them to explain exactly who "they" were. The answers ranged from "those guys on the TV," to "my book club members," or "a neighbor who is in the business." As a contrarian, I've heard these kinds of concerns in the past. It usually means that when the pack is leaning one way, you should be looking the other way. I say stay invested, look beyond a month or two, and prosper by the end of the year.
A reminder, there will be no columns over the next two weeks while my wife and I are in Norway on vacation.
@theMarket: Record Highs Coming Up?
As of Friday, we were in striking distance of a record high on the S&P 500 index. We have been here before, but something tells me that this time we just may break through. But for how long?
Granted, stock market volumes are exceptionally light, which is understandable, since we are heading in to one of the slowest weeks of the year. That makes any new highs suspect until volume improves. We would need to wait another week or so for that to occur. Next weekend is Labor Day and it is only after the holiday that the Big Boys get back into town.
What those players will do, once they are back in the cockpit, will determine the short-term direction of the market through September and into the end of October. There will not be a lot of upside catalysts to drive stocks higher during that period. But there are several issues that could pressure the downside.
Readers are already aware of the major risks: tariffs, higher interest rates, unpredictable tweets from the White House, etc. Some investors, as I mentioned last week, have already positioned themselves for an uptick in volatility by buying some of the more defensive sectors of the stock market.
We have also noticed that certain economic data points have failed to live up to the market's high expectations. That does not mean that growth has slowed. It just means that we may be reaching a bit too high right now for the numbers.
Even the Federal Reserve Bank's latest minutes reveal some concerns. Fed members are watching the developing tariff issue closely. Yet, they do not see any reason to stop hiking interest rates, but they are watching. Most central bank experts expect two more interest rate hikes this year (one next month and a second in December). Those expectations are already priced into the markets.
In an address to the annual Jackson Hole symposium of central bankers on Friday, Fed Chief Jerome Powell assured us that the economy is strong and that its performance will continue. Inflation is under control and he sees no signs of overheating.
Powell said that the Fed's gradual interest rate tightening policies will continue. He ignored the recent comments by the president, who has complained recently over the Fed's tightening policy, but Powell did say he was concerned by the government's burgeoning deficit,
the slow rate of wage gains, and the disappointing productivity among the nation's corporations. The Fed can do nothing about any of the above, however. Those are issues that Congress and the president must address.
Markets rightfully interpreted his comments as "dovish," at least on the margin. As such, readers should not expect a bear market anytime soon. At the worst, we could see more volatility over the next few weeks and months (both up and down). And while the earnings season is over for now (79 percent of companies "beat" profit estimates, while 72 percent beat revenues), analysts are already upping their forecast for profits and sales for next quarter.
As we head into the last days of the summer, I expect nothing negative to spoil your vacations. As for me, I want to advise readers that next week will be my last column until mid-September, when I return from a two-week vacation in Norway.
@theMarket: Will Stocks Break Out or Break Down?
The S&P 500 index is within a hair's breadth of breaking out. This week we topped 2,850, which we haven't done since March. The record high for the index in January was 2,872.
Can we top that?
The S&P 500 Index traded within 0.5 percent of its record high this week. If we can close and hold a new high, it will be the 18th time the benchmark index has closed at a new all-time high after going six months without one. Statistically speaking, the odds of doing so are against us. Normally, if we use historical data, it should take the index another year before we reach a new high, but there is nothing normal about the environment we live in today.
Last week, I wrote that the market was locked in a trading range. The up and down action, I said, could continue through September and into October. At that point, I was expecting another move higher. I may have been too conservative, but the proof will be in what happens next.
We have been climbing for several consecutive days from a low of about 2,800 to the present level. NASDAQ and the FANG stocks have regained all their losses, while the overall market has risen on the back of positive second-quarter earnings results. What's more important is that overall guidance by corporations was bullish as well.
Technically, if markets are going to continue in this trading range, we should see a pullback soon. The key would be what level the bulls are willing to defend on the way down.
The 2,850 level on the S&P 500 would seem the obvious place to find some support. If not, well, chances are we go back to the recent trading range lows.
The absence of new news, now that earnings season is over, could also weigh on the bulls. And don't forget Washington. At any moment, a tweet from the White House could spoil investors' hopeful moods.
Have you noticed, however, that the tariff tantrums are affecting the market less and less?
For one thing, when you add up all the real or threatened tariffs, the impact on global growth is minuscule. Ken Fisher, an investment adviser I respect, wrote a piece for USA Today. In it, he argues that all the commentary, both pro, and con, on the tariff situation is wrong. He did the math, assuming the worst-case scenario happens. The global economy, which is worth some $80 billion a year, is estimated to grow by about $4 trillion in 2018. He calculates that if $161 billion in tariffs were levied on the world's consumers, it would only comprise a mere 4 percent of that $4 trillion in global economic growth. That's not much to get worked up about, now is it?
Patience is the keyword for 2018 when it comes to investing. Whether we break up or down in the short-term is immaterial. In the long run, let's say by the end of the year, stocks will finish the year higher.
@theMarket: Stocks Set for a Volatile August
This month would be a good time to go on vacation. Otherwise, you might be tempted to do something rash like chase stocks or sell at their lows. That is the kind of market volatility investors should expect in August.
The market's trading range is still intact and should continue and keep stock market values corralled into September and probably October.
We had our moves up to the old highs (or slightly beyond) in most of the averages in July. A combination of anticipated stellar second-quarter earnings and somewhat less rhetoric from the "Trumpster," allowed equities to notch their fourth month of gains. Second quarter earnings have come in as expected for the most part, but much of that excitement is behind us. We still face the prospects of a trade war and all that might entail. The Fed is on hold until next month, but the bond vigilantes are expecting the central bank to raise rates again in September.
In the absence of any market-making good news, it would be a safe bet to expect stocks to drift lower by a couple of percentage points.
Since the real action won’t start until after Labor Day, any pullbacks or melt-ups will be trader-induced, on low volume and are as liable to reverse at odd or unpredictable times. This could last a few weeks until the algos and day traders exhaust themselves. By the end of the month, watching grass grow should be more exciting than watching the tape.
Since I am not a political analyst, you — reader — will have as much insight as I do on whether the GOP will maintain their majority in the House and/or Senate, or cede those positions to the Democrats. The question to ask is how the markets will react to the mid-term election outcomes.
If the GOP emerges victorious, I suspect stocks will rally. If the Democrats win, there may be a bit of disappointment, at first, but then markets will soon realize that a stalemate in Congress is a good thing for the markets.
In prior years, when Congress was divided, (think the Obama years), markets rallied because the logjam in Congress meant no new legislation. That equaled predictability and removed politics from the investment equation. Remember, investors like an atmosphere where
they can count on the status quo to continue. Granted, it may not be good for the country, but it is usually good for stocks.
The caveat must be Donald Trump. Nothing about the president is predictable. With a hung Congress, he may well resort to executive orders to advance his objectives. He may even reach across the aisle in some areas to forge a deal with the Democrats. I would expect a divided Congress would also increase the pressure on the president personally, as well as his cabinet, in the Russian investigation, personal finances, etc.
If the Republicans win, and Trump also increases his base support, it is anyone's guess on how the markets will react.
On one hand, Trump's Transformation of America would likely proceed with the ship moving at full-speed ahead. More tax cuts for the wealthy, the Wall will finally go up, immigration will slow to a trickle, business will enjoy even more benefits and the markets would
However, a full-blown trade would also become a real possibility. Higher tariffs would spark runaway inflation, interest rates would spike higher, the deficit would balloon, while tax revenues drop. Economists and Wall Street, alike, are convinced (although Main Street is not)
that the kind of tariffs Trump is threatening will not only hurt the U.S. economy but would most likely sink the global economy. A combination of all the above would be a "bridge too far" for the stock market, in my opinion.
In any case, preliminary polls (if they can be believed) indicate a tight race. Traders are already re-programming their voice-activated computer trading bots to sell or buy on the latest polls. The media, social and otherwise, will have a field day extrapolating every nuance and wrinkle of the race.
And, of course, we can count on a continuous stream of tweets cascading from the White House interrupted only by the delivery of yet another Big Mac with fries. Given that scenario, you better rest up now because this Fall could be a real humdinger.