Market Sentiment: 10.24.18
For the past two weeks, the market has seen a pretty incredible sell-off. Since October 3rd, the S&P 500 index has dropped from 2880 points to 2705 at the time of this writing. It looked like there would be a nice recovery last week, but we have seen another sell-off at the end of last week through this week that has nearly wiped out all of the gains from 2018. Interestingly, corporate earnings thus far have generally been very solid, making the most recent sell-off even more worrisome.
Why has the market been performing so poorly?
Despite the trade war, US equities have actually been performing quite well. Again, latest earnings reports have largely come in with earnings beats. However, the Fed’s strongly hawkish statements at the most recent meeting have had a huge impact on interest rates. Powell’s statements suggest an additional hikes in 2019 to bring the funds rate to 3.4%. Investors did not anticipate such hawkish comments, especially given that economic data points to relatively flat inflation. Therefore, additional rate hikes would result in hikes in real interest rate. This generally discourages both consumer and business spending, and imperils some highly levered businesses. All of that to say - investors believe that the economy will genuinely begin to slow down as a result of these anticipated rate hikes.
It’s very difficult to say what will happen in the coming weeks. My present stance is that the market will rebound modestly to close out the year, and that the Fed will again hike rates in December. However, they will likely provide comments that may point to a more accommodative approach in 2019, considering the enormous backlash from Trump and others regarding the aggressive rate hikes in the face of economic data that doesn’t support the need for additional hikes.