Wild Week as Soft Jobs Report Helps Stocks After ISM and Services Drubbing!
“It’s like déjà vu all over again.” Yogi Berra
We have all heard the famous quote from Mark Twain, “History doesn’t repeat itself, but it often rhymes.” Yogi’s quote is a little more humorous for it’s absurdity, but we get your point,Yogi. Let’s apply this idea to the key question for investors: Will the last three months of this year turn out the same way as 2018 did? Let me provide some data to jog your memory, in case you forgot what took place. From the time period of October 1, 2018 through December 31, 2018, according to Dow Jones, the Dow Jones Industrial Average lost 11.83%, the S&P 500 fell 13.97%, and the NASDAQ dropped 17.54%. The low point for each of those indexes during the time frame was on December 24, 2018, right before Christmas. On that day, the Dow was down 17.64%, the S&P 500 retreated 19.32%, and the NASDAQ sunk 23.03%. As you can see, during the last week of the year, those indexes recovered some of their losses. Much has been written about the cause of the selloff, be it Fed policy of raising interest rates, liquidity and currency issues across the globe, rich valuations of long time stars in the high tech sector, just plain profit taking, or poor earnings reports. It may have been a little bit of all of them. Let’s see where we are today to look into the crystal ball and perhaps provide clues about the trillion dollar query and how things proceed.
Over the last few months, economic data has increasingly shown that activity across the globe is lower, and confidence among corporations has slumped for any number of reasons, including uncertainty about how trade negotiations ultimately get resolved, especially between the United States and China. Most businesses, often run by highly educated and intelligent people, do not make multi million dollar decisions about capital investment without being confident that the environment and circumstances they see aren’t going to dramatically change. In the event leaders suspect there will be a dramatic shift, guess what, those dollars do not get invested. One only has to look at Amazon in New York City as a prime example. Circumstances changed, and Mr. Bezos said, “Uh, I’ll pass.” Last week, the ISM supply chain number, called the PMI (Purchasing Managers Index), came in at 47.8, the worst reading in nine years. The day after, we got the non manufacturing index reading, known as the service sector, and it tallied 52.6, down from 56.4, while the estimate was for 55.3. It is important to understand the service sector makes up 85% of all economic activity, while the manufacturing number is under 10%. Anything above 50 is expansion. Investors decided to click and sell on Tuesday and Wednesday after seeing those slowing figures, and the damage was pretty extreme, to the tune of over 800 points on the Dow. So what turned things around?
On Friday, we got a soft jobs report of 136,000 jobs created for September, lower than the 150k which was expected. Investors reacted favorably because the miss confirmed the idea that the Federal Reserve will continue to lower interest rates at the meeting in a few weeks. Essentially, investors are betting on the old Marty Zwieg idea of “Don’t fight the Fed.” On the corporate earnings front, we will get the full assault starting with the banks. As for the next three months, my own feeling is that you do not currently have the same cocktail of factors which helped cause the selloff last year. First, the Fed is easing, not tightening. Second, global stock markets have seen good performance as opposed to last year, where the pain was deep all over the world. Problems in one country can cause selling in another market. Selling in multiple markets can intensify the liquidity pressure in the most liquid market. We don’t have that dynamic today. Third, the psychology is different as complacency ran amuck after the September quarter last year. Investors are anything but relaxed today. In that light, trade issues, Brexit, trillions of negative yielding bonds, and political uncertainty everywhere you look all heighten the skepticism of investors. In my experience, selloffs take place when the unexpected isn’t considered or imagined, not when it is thought the norm. Is it possible we have another fourth quarter where investors decide to sell everything? Sure. I suspect not, however, and you have a better chance of treading water and entering 2020 with a nice year. With that said, it is important to acknowledge the challenges facing investors. Political unpredictability and uncertainty is probably going to be with us for a long time, at least the foreseeable future. The same holds true with trade and potentially currency issues, which affect the bond market. The fixed income area also remains a wild card, and is always a crucially important asset for comparison to stocks. As always, the key component is corporate earnings, and on that note, generally speaking, corporations are making lots of money, think trillions in the aggregate. Given that, keep your nerve, and we should come through things pretty well. It pays to stay optimistic, or at the very least, try and laugh at Yogi’s quote.
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