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Rutger Geleijnse
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Blame the gains.
Why do you ask? After all, the Dow Jones Industrial Average gained 25344.34 points last week, or 104.35 points, or 0.4%, while the S & P 500 rose 2.67 points to 2767.78, and even the Nasdaq Composite finished the month with only 0.6%, at 7449.03.
But the end results belie the volatility that has challenged investors all week. The Dow started the week down, gained 548 points, or 2.2%, Tuesday, lost 327 on Thursday, and was unable to retain a gain of more than 200 points on Friday. This tour de force had many reasons, ranging from Italy's clash with the European Union over its budget, the slowdown of the Chinese economy and the fall of the stock market to concerns about rising rates. "It's a lot of special risks," says Vinay Pande, head of short-term investment opportunities at UBS Global Wealth Management. "Generally, when you have idiosyncratic risk, you do not have sustained volatility; you have episodic peaks. "
But we prefer to focus on corporate profits. At first glance, they were not so bad. According to Bespoke Investment Group, about 72% of companies that have reported earnings so far have exceeded their forecasts, which is close to the highest rate in 20 years. But the good news ends there. Just 58% of companies outperformed their revenue forecasts, the lowest rate in six quarters, and the reaction to earnings was even worse, with the average US stock falling 0.7% on the day of trading. which followed its publication. And God forbid us to miss a business, in which case they dropped an average of 5.7%. "We see investors selling their information, good or bad," says Bespoke co-founder Justin Walters.
There is a good reason for that. With rising interest rates, rising wages, rising rates, and the impact of tax cuts starting to plummet, earnings growth is starting to peak.
JP Morgan
Strategist John Normand notes that growth probably reached a quarterly high in the second quarter of 2018 and 12 months in the third quarter. If this is the case, the market is likely to be strongly influenced by the market: since the beginning of the 1990s, stocks have outperformed bonds for another seven months, on average, after soaring profits. "This inflection point is important because it tends to overlap – within a few months – with the largest rotations of investors in global portfolios," Normand writes.
The good news, however, is that profits continue to grow, which could help the S & P 500 find a fund, at least in the short term. Even with a slowdown in earnings growth, the S & P 500 still trades at 15.9 times earnings at 12 months, up from 16.9 times on September 21st. This is close to its long-term average of 15 times, which means that stocks could approach valuation floor, for the moment. "The risk is 15 times lower than at the high end," says Todd Lowenstein, chief equity strategist at Union Bank. "This would give a superior appearance to the risk-reward of stocks."
Still, with the long-term outlook being so uncertain, this may not be the best time to start reducing stocks to cash. After all, it's possible to get a significant return on your money, which would not have been the case a year or two ago … and those returns are likely to improve. "As a conservative investor, keep in mind that each incremental rate hike means you're getting better returns from your cash reserve," says James Stack, president of InvesTech Research, which recommends a 33% allocation in cash. cash in his company's most recent model portfolio.
Prevention is better than cure
Write to Ben Levisohn at [email protected]
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