(New York)

The stock market has had an undeniably rough quarter. We are currently in the midst of the second big rout in the last two months and indices and markets are essentially flat for the year. However, things are actually much worse than flat if you dig slightly deeper. Get this—forward looking P/E ratios are down a whopping 17% this year. In fact, the fall recently has been one of the worst in decades on a valuation basis. In 2008, valuations only slid 18%, just one percentage point more than this year. It is the third biggest drop in valuations since 1991.

FINSUM: This is a very ominous sign in our opinion, as shares have plunged even as stellar earnings have come out. Classic case of buy the rumor (2017), sell the news (2018).

(New York)

Stock markets have been taking a beating lately. Between worries over trade and rising rates, as well as the fading effects of tax cuts and the prospects of weaker earnings, stocks have been getting hammered. Now there could be another material blow coming: corporate deleveraging. For years, companies have gorged on debt to fund buybacks and dividends. However, as rates a rising, they are now under pressure to deleverage, and there will be increasing plans for paying down debt. All of that means companies will be spending less in equity markets and on growth.

FINSUM: This is bad news. Stock buybacks have been one of the main drivers of returns the last few years, and the evaporation of that stimulus will add pressure.

(Houston)

When oil falls it tends to boost the US economy. For all the growth of our shale industry, the US is still a net importer of oil. When prices fall, Americans tend to spend more on other items that boost the economy, so oil prices sinking is usually good news. However, this time around, the fall will be bad, at least according to the Wall Street Journal. The problem is that the oil industry has grown large enough that capital expenditures in the sector make a major impact on growth. Accordingly, the capex cut that will come from falling prices will be prove a net detriment to GDP figures.

FINSUM: When oil fell in 2014-2016, US economic output also slowed, so this is a very real affect. What is worse is that it will likely show up in 2019, which is already looking to be a much weaker year.

(New York)

Christmas is not looking very merry for retailers. While 2018 has been kind to retailers, especially compared to 2017, the fourth quarter has been rough. The stocks have been getting hammered on the back of weak guidance from a handful of companies in the sector. Not only are retailers under topline pressure from ecommerce, but costs are rising too, squeezing margins. As an example, Target’s shares fell 9% on Tuesday and the shares are down by more almost 20% since August.

FINSUM: This selling pressure seems to be a combination of economic worry and fears about rising costs.

(Istanbul)

The big crash in oil has a lot of investors worried. Generally speaking, falling oil prices are seen as a bad sign, as they tend to forecast a weakening economy. However, this time around, there is a big beneficiary—emerging markets. The large majority of EMs are oil importers, which mean they benefit from weakening prices. Accordingly, countries like India and the Philippines are seeing benefits to their currencies, and likely, their economies. Indonesia and Turkey are also big oil importers.

FINSUM: This is more of a silver lining to a negative than a positive development in itself.

(New York)

Vanguard appears to be taking action on one it its biggest weaknesses. Others in the industry, notably Fidelity, have been making moves to try to make their funds ever more accessible and cheaper. Vanguard has been the low cost leader for years, but some of their features now make them look slightly outdated. Perhaps no longer. For its Admiral Shares class, its cheaper option, Vanguard has lowered the minimum investment from $10,000 to $3,000, a significantly lower threshold for younger and less wealthy investors. The changes will apply to 38 of their index mutual funds.

FINSUM: This is a good move but we are surprised they didn’t just change it to no minimums.

(New York)

Here is a big warning. Goldman Sachs says that with bonds and stocks falling, and the outlook remaining poor, cash will be king. The bank thinks that stocks will only rise by single digits in 2019. In the words of Goldman analysts, led by David Kostin, the chief of Goldman’s research arm, “We forecast S&P 500 will generate a modest single-digit absolute return in 2019. The risk-adjusted return will be less than half the long-term average. Cash will represent a competitive asset class to stocks for the first time in many years”.

FINSUM: Goldman basically think T-bills are a great buy right now and we have a hard time disagreeing. The yields on short-term holdings are very favorable and quite rate insensitive.

(New York)

Merrill Lynch’s new compensation plan is not being received well by brokers. Many are angry about certain aspects of the plan and are pushing back. In particular, brokers don’t like that the plan incentivizes them to tell clients to take on more debt during a period when interest rates are rising. Around 15,000 advisors have complained to Merrill Lynch management. Management responded by saying it was a good incentive and was designed so that it didn’t heighten conflicts of interest.

FINSUM: This seems like it will just create misaligned incentives, especially given that it is being put in place when it is very unfavorable to be adding debt.

(New York)

One of the surest signs in the economy right now is that real estate is in trouble. Data coming out of the sector has been consistently weak for months and shows a clear downtrend in the housing market. Rates seem to be playing a big part of that, as demand for housing has sunk as rates have risen. That could prove one of the few brakes on the Fed’s relentless rate hike path. The fall in real estate comes at a time when the market should be surging, as unemployment is at extreme lows and Millennials are entering their peak home buying years.

FINSUM: Besides stocks and bonds freaking out, real estate is one of the areas showing a lot of weakness, and this it is perhaps one of the few aspects that could stop the Fed.

(San Francisco)

As of today, the FAANG stocks have shed over $1 tn in market cap since their recent highs. The turmoil pulled markets down around 2% across indices, with the Dow seeing the biggest drop at 2.21%. The losses mean once again that indices have lost virtually all their gains for the year. As one CIO put it, “absolute bloodbath for technology stocks”. The selloff seems very forward looking, as investors are quite focused on what might go right and wrong in 2019. The biggest worries seem to be around trade.

FINSUM: Here is a question: why exactly is tech selling off? Apple obviously has its own problems, but those particular issues don’t seem very relevant to Facebook etc. Panic?