Research & Advice

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Pessimism reigns over the financial markets

It never fails. A couple weeks of declining markets and everybody becomes bearish. “New bear market unfolding,” “An end has a start,” or “More evidence of a global bear market” are just some of the headlines I’ve read in the past week. How did we go from bullish to bearish in such a short time period?

I’ve been in this business long enough to recognize the fear and flight behavior of most human beings, including me. I’ve written in the past that humans are not cut out to invest from a behavioral point of view. Our cellular memory, going way back to the caveman, tells us that when a bear enters your cave, you run and run hard.

Fast forward to today. The markets dropped 6% or so in a relatively short time, then rebounded erasing about half of the decline, only to fall again. We have all been here before, most notably in February and March of this year, but that little guy that sits on our shoulder keeps whispering “This time it’s different. This could be the Big One.”

Am I right?

Sure, there are challenges facing the financial markets over the next few months. The trade war that isn’t. Higher interest rates, due to the Fed tightening. Worries concerning global growth. After all, didn’t the International Monetary Fund (IMF) just cut its forecast for global growth this week for next year from 3.9% to 3.7%? They also reduced their estimates for 2018 and 2019 U.S. economic growth to 2.9% and 2.5%, respectively.

Over in Europe, Italy’s populist politicians are insisting on spending more than they have, which is increasing the deficit and sending their stock and bond markets into bear market territory. Investors worry that the Italians could spark another contagion episode like the world experienced several years ago in Greece. And Brexit is still a concern, with the U.K. and the E.U. at loggerheads over their own trade issues.

Then there is China, which just reported a drop in their GDP to 6.5%, which was below estimates. That news sparked further downside, adding to the already 30% stock market decline in China since the beginning of this year.

I could go on: mid-term elections, the Mueller investigation, global warning, Friday the 13TH, how about zombies, or that this is the last season for Rick Grimes? The point is that we know all this stuff already and have for most of the year. So why has the market suddenly decided it is just too much to handle? Because we needed a correction and, given that fact, any reason will do. Take your pick.

But none of those excuses matter. We are simply doing what the markets have done in every mid-term election year since World War II. And don’t forget that markets pull back 2-3 times a year just like they are doing now. It is not a time to sell. It is a time to buy.

Earnings season so far is revealing that corporations are holding their own. About 70 companies have revised down expectations while 68 have revised their profits expectations higher. That’s much better than I had hoped. Remember, I was worried that peak earnings were behind us. Results would be good, but not as good as the last two quarters. So far, most results have been about even, or slightly better.

As for the IMF growth reductions, the justification for the down-grade was their expectation of a global trade war. Trump’s trade policy of speaking loudly but carrying a little stick will prove those expectations wrong in the end.

But we may not be out of the woods quite yet. Normally, markets will attempt to re-test their lows before a sell-off is over. That could mean more volatility. Remember, October is only half over and then we have the elections in the first week of November. We could easily see that re-test of the averages. In the case of the S&P 500 Index, last week’s low was 2,710, in case you’re interested.

Posted in A Few Dollars More, At the Market