1. Market Recap: Another tough week as equity assets probed lower for a valuation level to rally from. Markets are looking for relief on trade and the Fed's stated stance on interest rates. Mid-term election uncertainty and technology earnings concerns also weighed heavy. The Dow and S&P 500 are both at, or close, to a 10% correction from their recent all time highs. Both Indexes are currently positive on the year by 2.71% and 2.65% respectively while small cap, mid cap and international stocks are squarely in the red. From a valuation perspective, barring significant earnings disappointments, stocks are fairly inexpensive. Large Cap stocks trade at a reasonable multiple of 15 times their next twelve month's (NTM) earnings while international and emerging markets stocks are particularly cheap at 13 and 10 times earnings, well below historical averages.
2. Chart of the Week: Fear Indicators Reach Buy Levels: CNN’s Fear & Greed Index hit the “Extreme Fear” level this week. This reading has typically coincided with market rallies. Bespoke Investments calculated the number of stocks hitting oversold levels (https://money.cnn.com/data/fear-and-greed/). A reading above 60% has tended to spur decent rallies, We're at close to 80% now.
3. GDP Friday: US Gross Domestic Product, the value of every good and service produced within the country, advanced at a 3.5% growth rate according to the Commerce Department. Consumer spending and business investment drove growth, and inventory accumulation also contributed. The U.S. economy produced its best back-to-back quarters of growth since 2014, handing President Donald Trump a $20 trillion talking point just in time for the midterm congressional elections. Today's report is the last data before the Nov. 6 vote. While it’s hard to determine how much a strong economy will influence electoral sentiment, President Donald Trump had promised “outstanding” growth leading up to today’s report.
4. Correction Territory, What’s Next?: Here is Investopedia’s Definition of a “Correction”: "A correction is a reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. Corrections are generally temporary price declines interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either." The latest stock market correction occurred on February 8, 2018 as the DJIA and the S&P 500 fell more than 10% from their recent highs hit in late January, 2018. So We Are In A Correction, What Next? We turn to Ben Carlson for some context. He did the math on how many times a 10% correction for the S&P 500 has turned into a 20% drop or a bear market since 1928. Nearly 60% of the corrections did not lead to a bear market. Quantifying the average drawdown and time frame that these cycles lasted for: “The average correction which saw stocks drop 10% but not enter bear market territory was a drawdown of -14%, lasting 132 days from peak-to-trough. "
5. Earnings Are Coming In Strong: Offering a positive backdrop to this volatile market is the fact that corporate earnings are generally robust. Third Quarter S&P 500 earnings are up 20% year over year with over 200 of the S&P 500 reporting thus far. Next week is a big week with a slew of high profile companies reporting. Analysts will begin fine tuning their 2019 S&P 500 earnings estimate which had been in the +10% range. The commentary of S&P 500 companies and the earnings guidance they give the Street next will be closely watched. Here are just a few of the big names reporting next week: Coca Cola, General Electric, Pfizer, Facebook, Apple, Exxon Mobil.
6. Recession? Not Even Close. The Leading Economic Indicators are strong, unemployment is at historic lows, and economic growth is robust. Historically we have not encountered a recession for at least two years after the Leading Economic Indicators have peaked. The technical definition of a recession is two consecutive quarters of negative economic growth. The National Bureau of Economic Research (NBER) tracks all recessions and usually lets us know when we are in one, and precisely when we have emerged from one. We typically know when we are getting close. We are not. Volatility in the markets, corrections, and even crashes, do not always precipitate recessions. Far from it. Typically 66 percent of market sell-offs occurred outside of a recession.
7. Lucky Lottery: Single ticket in South Carolina wins the largest lotto prize in world history at $1.6 billion. The winner has yet to come forward. Two changes created these huge jackpots; doubling of the price to $2/ticket and reducing the chance of winning from 1 in 258,890,850 to 1 in 302,575,350. This was done because of fear of "jackpot fatigue" from paltry prizes of $100 million. In FY2018, lottery sales totaled $77.7 billion. Elliot F. Eisenberg, Ph.D.
What We’re Reading:
- Here’s How Much Money You Should Have Saved by Age 50 (CNN)
- Another Red Sox Title? Think of Boston’s Children (WSJ)
- Jony Ive on the Apple Watch and big tech’s responsibilities (Financial Times)
- When Stocks Fell 10% … (A Wealth of Common Sense)