…Stocks fall off the cliff in afternoon trade. Blame it on the loco Fed. Banks kick off earnings tomorrow. CPI inflation inches higher – COLA higher.
Financial Review by Sinclair Noe for 10-11-2018
DOW – 545 = 25,052
SPX – 57 = 2728
NAS – 92 = 7329
RUT – 30 = 1545
10 Y – .09 = 3.13%
OIL – 2.18 = 70.99
GOLD + 29.20 = 1224.60
After yesterday’s crash, Wall Street pros are debating whether the current slide is signaling more severe problems for a bull market that is more than nine years old. The answer is yes, we just don’t know when and how those problems will manifest. There was a concern that prices would crater on the open – that didn’t happen. Stocks opened lower but nothing significant; prices drifted lower throughout the session and there was even some buying in bonds, sending the yield on the 10-year note lower. So, this was a risk-off session but no sign of panic, at least until about 2PM Eastern time. At which point prices drifted below certain key technical levels, and the algorithms kicked in and … boom – the Dow was suddenly down 698 points. That, in turn triggered a buy signal, or maybe plunge protection.
The Nasdaq fell as low as 7,274 today, down more than 10 percent from the most recent 52-week trading high of 8,133.30. Amazon, Netflix and Alphabet are all in correction territory. The S&P 500 and the Dow Jones Industrial Average have further to fall to be in a correction with both down about 6 percent from recent all-time highs. The S&P 500 has now dropped for 6 straight sessions and has fallen below its 200-day moving average. There is some support for the S&P at 2690 to the round number of 2700; below that we’re looking at the April lows of 2580. The all-world stock market is down 9.7% from its January peak and 7.5% from its September high. The Dow Jones Industrial Average has sunk about 1,400 points in two days.
While the benchmark S&P 500 has fallen nearly 5% over the past week, and year-to-date gains have shriveled to just 2%, the damage is actually much more widespread. Two-thirds of the stocks in the index are actually down more than 10% from their recent highs, which means they meet the traditional definition of a correction. CNBC also found that, as of Wednesday’s market close, 142 stocks in the S&P 500 were in a bear market — meaning they’d dropped 20% from recent peaks. That’s 28% of the index. Micron and Tesla are off 35 percent from their 52-week highs. Facebook has fallen more than 30 percent. Netflix is down by 25 percent from its high and down nearly 10 percent this week alone. Amazon is off 17 percent from its high and by nearly 10 percent this week alone. Nvidia, Intel, Alphabet are also all down more than 10 percent from one-year highs.
With stocks on a losing streak and the Dow struggling to stay positive for the year, Trump called the Fed “loco” and “wild”, which is like describing watching paint dry as exciting and thrilling. The Fed is maybe the least loco thing in Washington. Then Trump blamed the Fed for the stock market tanking. The Fed has an almost impossible task of raising rates to normal, non-emergency levels – and we know that monetary tightening inevitably leads to recession. That’s what happens when money gets tight. Backseat-driving the Fed like this may just be bluster and blaming, but it’s still really not smart. History shows that trying to push a political agenda on the Fed has a tendency to end very poorly. When the market was going up, Trump claimed all the credit, now when the market is crashing, he blames the Fed. And while some people are concerned about rising interest rates – quick reminder, the Fed tries to hike rates when the economy is strong. Also, Trump should take some of the blame for uncertainty about his trade war with China. While the tariffs’ impacts have yet to be felt as they have just been implemented, there’s fear spreading that when company executives deliver their outlooks soon, the news won’t be good. That’s compounding fear that already has rippled through the financial world that after years of being dormant, inflation is finally on the prowl. Earnings will be in-line, but we’ll be watching forward guidance and it will probably be ugly compared to the past few quarters.
Anyway, the most common excuse for higher rates hitting stocks is that people will exit stocks in favor of bonds as yields move higher. I don’t buy that. Higher yields mean lower prices. Instead, stock investors run from equities because higher yields mean cash and credit is more expensive, which cuts into margins and slows growth – which in turn, eats into earnings. So, higher yields demand higher earnings, to offset the higher expense, and that means PE, or price to earnings ratios are now out of value – something has to give – and earnings are not going to show the same kind of explosive growth in 2019 as we have seen so far this year.
Of course, that’s just a guess. Nobody really knows why the stock market goes up or down on any given day. We know that at 2 PM Eastern stocks sold off hard and a few minutes later, buying kicked in. We call it algorithmic trading – the computers take over. We know this because we see the volume spike. We don’t really know why, other than to say we hit technical levels, but that doesn’t really explain the “why”. It is possible to trade technical levels, if you’re a technician or a quant; otherwise, don’t even try. You could bet that will see a bounce tomorrow morning, but that won’t tell you where the market goes tomorrow afternoon. Is it a real rebound or a dead cat bounce? And nobody knows what the market will do next week. Is this a buying opportunity or the start of a long, painful decline? Wrong question. What’s your plan B – that’s what you should be asking.
Earnings season kicks into high gear tomorrow. Rising interest rates and a booming economy should, at least in theory, be good for bank stocks. But you couldn’t tell it by looking at the bank stocks. Morgan Stanley is nearly 26 percent below its 52-week high, and Goldman Sachs is 22 percent lower, both hitting new 52-week lows. Shares of Wells Fargo are down 21 percent from their recent high, also near a 52-week low. Citigroup shares are down 13.5 percent, and J.P. Morgan Chase’s are down 7.6 percent. JP Morgan Chase and Citigroup are among the companies scheduled to report Friday before the bell. Expectations are high for this earnings season. Analysts polled by FactSet expect S&P 500 earnings to have grown by 19 percent in the third quarter.
In a risk-off environment, oil did not fare any better than stocks. Over the past two days, West Texas Intermediate crude is down $4 a barrel, or 5.3 percent, to $70.97, also a three-week low. Last week, it nearly hit $77 a barrel, posting its best level since November 2014.
In today’s economic data, it looks like the Fed has price stability nailed. The consumer price index rose 0.1% in September to mark the sixth increase in a row. Yet the increase in the cost of living over the past 12 months slowed again to 2.3% from 2.7%, the government said Thursday. Two months ago, the yearly rate hit a six-year high of 2.9%. A more closely followed measure that strips out food and energy also rose 0.1% last month. It’s known as the core rate of inflation. The yearly increase in the core rate was flat at 2.2%.
About half of the increase in the consumer price index last month was tied to higher rents and the cost of home ownership. The cost of clothing increased for the first time in fourth months and medical costs rose for the first time in three months. Prices for airline tickets and auto insurance also went up. Although gasoline prices actually rose last month, they did not increase as much as they normally do in September. As such the seasonal adjustments resulted in gas prices showing a decline. Food prices were unchanged. The cost of used vehicles fell sharply. There was some good news for workers. After adjusting for inflation, hourly wages rose a solid 0.3% in September. They are up 0.5% in the past year.
Social Security’s inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), only takes into account three months of inflation data rather than a full year. The average reading of the CPI-W during the third quarter of the previous year (July through September) acts as the baseline figure, while the average reading from the third quarter of the current year is the comparison. It takes the BLS a good week or so to compile all the data for the CPI-W’s main spending categories and subcategories, but we know the numbers, even without the official proclamation.
If the average reading from the third quarter of the current year rises from the average CPI-W reading from the previous year, then beneficiaries receive a raise that’s commensurate with the percentage increase, rounded to the nearest 0.1 percent. And should prices fall year over year, as happened in 2010, 2011, and 2016, benefits remain static from one year to the next. The good news for beneficiaries is that prices most definitely rose on a year-over-year basis. The COLA, or Cost of Living Adjustment for 2019 is 2.8%; this is the highest annual raise that beneficiaries have received in seven years. It amounts to $39 a month for the average retired worker.