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Quick Market Outlook (November 9, 2018)

It was a rough October. And although this week saw a massive rally, we ended the week with the S&P falling 0.9% and the Nasdaq 1.65%.

What’s Happening?

There’s a quality-of-earnings problem.
Of the companies that have reported earnings:

  • Revenues above estimates: 59% (a low number)
  • Avg. revenue surprise: 0.8%
  • Q4 Guidance: 63% have guided down

Growth has peaked.

The stock market is concerned.

In one month (October) stock market annual growth has shuddered to a halt: from a 15% rate to 3%.  Not gradual.  Sudden.

Why it’s happening.

It’s risk off for stocks.

Fundamentals and liquidity are combining to push down stock prices.

  • Economic growth is set to slow:  China and Europe were already slowing. But tariffs have added enough uncertainty that trade has slumped harder, and there’s more blowback coming through to the U.S. economy.
  • Higher rates make stocks look pricey.

I still haven’t seen a good explanation this newfound volatility downward. I still am not certain about the catalyst. And that’s a problem for me.

Let’s go with the idea that the market is prescient and is pricing in something close to a recession. That still doesn’t explain the suddenness of the drop.

I’m left with the view that the September Fed hike made investors finally sit up and notice.

The Fed fund rate hit 2.25% and the economy is set to slow to ~2.5% in 2019. The Fed is talking about adding another 100 basis points (bps) – equivalent to a full percentage point – to bring the rate to 3.25%.

That implies negative real growth. This is making money managers nervous. Why raise rates as growth is slowing?

I happen to think the tide shifts again this month. Here’s my prediction:

I think China will blink. The Russian collusion nonsense will finally be closed. And the Fed will start to signal that 2019 rate hikes may be slowed.

This will be good news to the markets.

For this week, expect the market to grope for a catalyst for growth.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

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