Stocks Commentary
Previous

Stocks: Silver Linings

November 2018

Unless you’re a short seller or just enjoy pain, you’re likely happy to have October in the rearview mirror. Domestic markets experienced bouts of volatility coinciding with sharp daily declines – the S&P 500 didn’t experience back-to-back positive performance days until the last two trading days of the month. Without a 2.6% rebound on the 30th and 31st, things would have looked and felt much worse. Once October had mercifully come to an end and the dust had settled, the S&P 500 had declined 6.9%, while the small-cap Russell 2000, which outpaced the S&P 500 for most of the year through September, had fallen 10.9%. International markets, even after posting year-to-date losses through September, again failed to garner much interest from those taking profits in domestic markets, as the MSCI EAFE fell another 8% while the MSCI Emerging Markets Index dropped 8.8%.

We’ve read a litany of commentaries, articles, musings, and diatribes in which an author attempts to pinpoint, ascertain, or explain away the root cause of the sell-off in domestic stocks – we’re going to add our two cents here. Most pundits appear to have settled on the premise that U.S./China trade “reality” hitting home, a perceived slowdown in domestic economic growth, and out of touch or ill-advised comments from FOMC Chair Jerome Powell related to how much higher the Fed funds rate might need to go as drivers of the most recent market pullback. Additionally, corporate buybacks were halted in advance of earnings season as companies entered black-out periods, while at the same time hedge funds and other large institutional investors attempted to beat peers to the profit-taking punch as the third quarter wrapped up. These were contributing factors, as was algorithmic or program trading, which likely exacerbated intra-day moves to the downside. There have been fewer large buyers willing to step in while there have been plenty of computers willing to sell/short mid-afternoon as stocks fall. The sell-off has been painful for those overweight risk assets, but we see silver linings amid the chaos.

Third quarter earnings, broadly speaking, have surprised to the upside. With 75% of S&P 500 companies having reported, year over year EPS growth has been 26.4% – this after 25.2% year over year growth in 2Q. While earnings have remained strong, valuations based on projected forward earnings have become more attractive. The S&P 500 traded at 16.4X expected full year 2019 earnings at the end of September, but earnings estimates remained stable as stock prices gapped lower during October, and the S&P traded at 15.2X projected ‘19 EPS at the end of the month. After making a beeline higher in early October, rates were range bound over the back half of the month. The 10-year U.S. Treasury yield closed October at 3.15% - 6 basis points higher than where it began the month. Interest rates stabilizing should benefit stock prices as analysts aren’t being forced to revise assumptions related to discount rates on projected future cash flows, boosting the present value of those cash flows. Earnings multiples tend to compress as rates move higher, so avoiding another rate spike may allow the S&P 500 earnings multiple to expand a bit.

It’s notable that the yield curve steepened a bit during October, relegating those calling for an imminent recession due to economic “signals” sent from a flattening yield curve to the backburner. U.S. economic growth should slow from around 3% in 2018 to the mid-2% area in 2019, but a recession remains far away. Interest rates are low, wages and productivity are gradually rising, consumer and small business confidence remain high, and the potential exists for capital expenditures to accelerate into year-end. U.S. stocks appear fairly valued, while international stocks appear cheap, but for good reason. As we close out 2018, investor attention will remain on U.S./China trade relations and FOMC monetary policy.

Source: Bloomberg

Next

On a scale from 1 to 5, with 1 being 'Not Good' and 5 being 'Excellent', how would you rate this article?

Press enter to submit your rating

Rate this Article

Use this form to provide additional feedback based on the rating you provided.

Thanks for Rating

Would you like to provide feedback?

Thanks for your feedback!

The content and any portion of this newsletter is for personal use only and may not be reprinted, sold or redistributed without the written consent of Regions Bank. Re¬gions, the Regions logo and other Regions marks are trademarks of Regions Bank. The names and marks of other companies or their services or products may be the trademarks of their owners and are used only to identify such companies or their services or products and not to indicate endorsement or sponsorship of Regions or its services or products. The information and material contained herein is provided solely for general information purposes. Regions does not make any warranty or representation relating to the accuracy, completeness, or timeliness of any information contained in the newsletter and shall not be liable for any damages of any kind relating to such information nor as to the legal, regulatory, financial or tax implications of the matters referred herein. This material is not intended to be investment advice nor is this information intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Regions Wealth Management is a business group within Regions Bank that provides investment, administrative and trustee services to customers of Regions Bank.

Neither Regions Bank nor Regions Institutional Services (collectively, “Regions”) are registered municipal advisors nor provide advice to municipal entities or obligated persons with respect to municipal financial products or the issuance of municipal securities (including regarding the structure, timing, terms and similar matters concerning municipal financial products or municipal securities issuances) or engage in the solicitation of municipal entities or obligated persons for such services. With respect to this presentation and any other information, materials or communications provided by Regions, (a) Regions is not recommending an action to any municipal entity or obligated person, (b) Regions is not acting as an advisor to any municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934 to any municipal entity or obligated person with respect to such presentation, information, materials or communications, (c) Regions is acting for its own interests, and (d) you should discuss this presentation and any such other information, materials or communications with any and all internal and external advisors and experts that you deem appropriate before acting on this presentation or any such other information, materials or communications.

Employees of Regions Asset Management may have positions in securities or their derivatives that may be mentioned in this report or in their personal accounts. Additionally, affiliated companies may hold positions in the mentioned companies in their portfolios or strategies. The companies mentioned specifically are sample companies, noted for illustrative purposes only. The mention of the companies should not be construed as a recommendation to buy, hold or sell positions in your investment portfolio.

This communication is provided for educational and general marketing purposes only and should not be construed as a recommendation or suggestion as to the advisability of acquiring, holding or disposing of a particular investment, nor should it be construed as a suggestion or indication that the particular investment or investment course of action described herein is appropriate for any specific retirement investor. In providing this communication, Regions is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity.

*Investment, Annuities and Insurance Products

  • Are Not FDIC Insured
  • Are Not Bank Guaranteed
  • May Lose Value
  • Are Not Deposits
  • Are Not Insured by Any Federal Government Agency
  • Are Not a Condition of Any Banking Activity