Stocks pulled back sharply as the Dow fell 799 points to 25,027. What was interesting is that trading volume was up for the Dow but lower for the NASDAQ indicating that big institutional investors were mostly holding tight. Banks were hit when the 5 year and 3-year treasury yields inverted and while some say this is meaningless it does indicate that the yield curve is flat.
With recent market volatility, tt seems we are living in two worlds. One world is “Fundamentals” and the other is “Perceptions”. Let’s compare the two.
Fundamentals: According to FactSet Research, with 96% of companies having reported Q3 earnings, actual earnings growth is the highest since 2010 at 25.9%. Revenue growth is roughly 8.5% and both numbers are better than what the gurus expected. The market PE is now below its 5-year average and standing at 15.1%. Wage growth and consumer spending (2/3s of the economy) just recorded their highest readings for 2018 at 0.5% and 0.6% respectively for October. Manufacturing (1/3 of the economy) just came in at 59.3 with the forward-looking new order index jumping to 62.1. 13 of 18 industries report expansion while 3 reported contraction with one of the those being housing. The US GDP growth rate is 3.5% which is the fastest since 2014. Inflation is tame at 2%. Small business optimism is at a record high. Holiday sales are on pace for a record. Oil prices are down, and unemployment is at a multi-year low. Bank reserves are at an 80-year high and Warren Buffett has been buying bank stocks by the gross as of late.
Perceptions: Things in the US are good, but they are about to slow down thanks to the risk of a global economic slowdown and rising tensions between and within various nations. The US yield curve is flat and parts of it are starting to invert which could be indicative of an economy poised to weaken and possibly experience a recession one or two years from now. Adding to the uncertainty about future growth rates are disruptions occurring in energy, politics, trade policy, retail and auto industries thanks to companies like Tesla, Amazon and Netflix.
So, there you have it. The US fundamentals are solid but what lies ahead seems fraught with uncertainty and markets do not like uncertainty. We should expect the volatility to remain for as long as the uncertainty remains. If, however the uncertainty is lessened then the gurus could most likely refocus on fundamentals which, if they stay the same, means the gurus could go long in such a fashion as to resemble a pack of hungry bulldogs jumping on the back of a meat wagon. Therein lies the risk.
The markets will be closed tomorrow in honor of the passing of our 41st President, George H.W. Bush. Hats off to a loved and respected figure. You get what you give, and he always endeavored to give good and to live up to his highest sense of right.