The Independent Market Observer

What’s Next for the Markets?

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Oct 16, 2018 12:03:08 PM

and tagged Commentary

Leave a comment

marketsAfter declines in the markets last week, the question at the start of this week was whether they would continue. The news from yesterday was, frankly, not all that encouraging. Markets did try to rally, only to fall at the end of the day. Nonetheless, there are reasons to believe that the markets are stabilizing and may even be headed higher over the next couple of weeks.

Markets not panicking

First, while markets bounced around Friday and yesterday, they have stayed within a range rather than resuming the earlier decline. This behavior is typical of a market trying to find its feet after a run of bad news—not one that is shaken and headed further down. Of course, we don’t yet know exactly where we will come out of this. But it appears it will be fairly close to where we are now. Markets are no longer panicking, and that is a good sign.

Good news for earnings

Second, we are now starting to get some good news from the earnings reports as earnings season begins. While we are still in early days, almost 7 of 8 companies are beating earnings estimates, and almost 7 of 10 are beating sales estimates—both of which are well above normal. Companies continue to do very well, and earnings growth is in line with expectations, so far, at more than 19 percent. These are very strong numbers and should help support the market.

Diminished trade worries

Third, so far at least, the comments on earnings show that while there are headwinds, they come mostly from the strong dollar—not from tariffs. Dollar strength is an old, well understood, and solvable problem that companies and the markets can work around. Tariffs were more feared and potentially less amenable to solutions. But companies, thus far, seem less affected than had been feared. Since trade concerns have been a major driver of market angst, this is good news.

Interest rates stabilizing

Fourth, interest rates have pulled back a bit from recent increases and seem to have stabilized. Higher rates are not necessarily a bad thing, especially when (as in this case) they are a response to faster growth. It was the speed of the increase that rattled markets, and the subsequent pullback should help reduce fears going forward.

What’s the big picture?

Big picture, there were—and are—real concerns about the underlying fundamentals that pulled markets down last week; however, most of those factors have moderated in the data released since then. Market price action, therefore, is reflecting the data. Prices are lower than before, to account for some of those risks, but really not by much, as the actual news hasn’t been nearly as bad as was feared. Looking forward, as more earnings news is released, what can we expect if the trends remain positive? Market fears should be further eased, which should be constructive.

It is worth noting there is one more tailwind for the market that looks likely to pick up in coming weeks: renewed company stock buybacks. In the weeks leading up to earnings season, companies typically suspend their purchases, which is likely one of the reasons behind recent declines. As they resume purchasing after their announcements, though, this should be one more factor supporting better performance in the rest of the quarter.

Markets should move with fundamentals

With the bad news not turning out as bad as expected and more good news potentially to come, last week’s reaction could end up being just a blip. While risks certainly remain, the fundamentals continue to be sound—and markets typically move with the fundamentals.


Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®