Displaying items by tag: volatility
This market is going against all precedent. December is usually a strong month for stocks, with momentum usually dominating trading. However, everyone knows this month has been brutal, continuing the strong volatility and losses that have plagued the market since October. The same old problems are dogging the market too—rising rates, a trade war, and the threat of recession. What has really gotten worse is that part of the rate curve has inverted, which seems to have really spooked investors globally. Last week the S&P 500 saw it worst performance since March, falling 4.6% for the week.
FINSUM: Here is a question for our audience: what is going to stop this market from falling? There are so many factors pushing the market down, none of them easy to resolve. This makes us worry that there is no floor on prices right now. Even the Trump-Xi “truce” didn’t save things.
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).
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.
The midterm elections are finally in the rearview mirror, and generally speaking, the results are exactly what the market expected. That means it may be time for a rush back into stocks after the turmoil of the last month. One analyst put it this way, saying “Following this week’s volatility and the FANGs selloff this week, we’re likely to see traders getting back in and buying the dip. The elections have been a win for both the Republicans and the Democrats, and this will bring balance to the market”.
FINSUM: We do suspect investors will breath a sigh of relief. Firstly, things went according to plan, but secondly, a split Congress is in some ways the best case scenario for stocks.
Barron’s has made an argument to investors. Despite all the turmoil recently, and the potential threat of the midterm elections, it says you should stick with stocks. Part of the reason is historical—stocks have usually continued to do well even when Congress flips (though the sample size historically is small). For instance, the stock market continued to perform well when Congress turned against Obama. On a policy front, the outcome looks positive too, as Democrats could limit some of the less popular policies of the Republicans, like a trade war, which would help US corporates.
FINSUM: We think the election is going to be positive for shares if everything goes as it is forecasted to. Any change from the blue House-red Senate prediction might shake markets.