Equity markets fell on Wednesday with the S&P 500 down 3.1%,
extending the index’s losses to 9.4% since hitting an all-time closing high
just a few weeks ago on 20 September. With today’s decline the S&P 500
has erased its price gain for the year. Bonds rallied with the yield on the 10-
year Treasury falling six basis points to finish at 3.11%.
Since the current sell-off began a few weeks ago, investors have been
worried about the potential negative impacts of higher interest rates, signs
of weaker global growth and potential disruption from tariffs. Data out
today reinforced these concerns. The revelation that pipe bombs were
mailed to well-known individuals and a media outlet likely only exacerbated
investors’ worries.
In Europe the initial reading on business sentiment for the month of
October, as gauged by the Markit Purchasing Managers Index, was weaker
than expected. Concerns about trade appear to be driving up business
uncertainty. In the US the Markit sentiment gauge was a bit stronger than
expected. However, new home sales weakened, stoking fears that the
increase in interest rates this year is weighing on demand.
Overall we believe 3Q earnings growth in the US will be strong with S&P
500 profits up 23-24% driven by 7-8% revenue growth on generally
healthy domestic activity.
However, unlike earnings reports in the first half
of the year, US companies are contending with some pockets of softness
in the global economy, especially in auto markets in Europe and China and
some shorter-cycle industrial markets.
Still, leading indicators for the US economy and earnings remain favorable
and we don’t believe the US is in danger of slipping into a recession in
the near term. For 2019 we expect continued, although slower, corporate
profit growth. Furthermore, Chinese policy-makers are pivoting to stimulus,
which should begin to gain traction in the months ahead.
The nearly 10% decline in US stocks over the last month appears excessive
relative to the risks that we highlighted. And valuations for US and global
equities have fallen to levels not seen since February 2016. As a result, the
risk / reward for stocks is becoming more appealing. We maintain a small
overweight to global equities in our tactical asset allocation.
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