November 2018

Wall Street Journal Headline Sums Up Last Month's Market Action:

October Selloff Sends S&P 500 Down 6.9% for the Month

After reaching all-time highs of 2940.91 on Oct 3, the index fell to 2601 Oct 29th. Nasdaq having led the rally this year was down 9.2% and the small cap index Russell 2000 fell 10.9% on the month. Many leading stocks saw bigger declines from their 2018 peaks; Alphabet -21%, Amazon -28%, Facebook -36.4%, Home Depot -20.6%, Netflix -36%, and Schwab -30%, just to name a few.

October, saw drops in almost every global stock market, as well as most bond indices.

Year to date drops, measured by iShares, in various categories tells the grim tale:

      • AGG -2.41%, Aggregate U.S. bonds

      • ILTB -8.84%, Core long term U.S. bonds

      • IEFA -9.4%, MSCI EFA index

      • IEUR -9.92% Core MSCI Euro stocks

      • IXUS -11.15%, Core MSCI Total non-U.S. stocks

      • IEMG -16.13% Core MSCI Emerging market stocks

Has the market for U.S. stocks peaked despite record profits, record low unemployment levels, low inflation and low long term interest rates with 3.5% GDP growth,3.1% wage growth and Consumer confidence the highest since 2000?

The market seems to be signaling an impending recession despite the lack of one in any economic forecast for 2019.

On January 26, the NYSE Composite index peaked at 13637.02 and closed at 12,200 by the end of October, never making a new high thereafter. At this year's 11,820 low we saw a 13.3% decline for a very broad market index. This measure dropped 20% from the April 2014 peak to its January 2015 nadir.

1-year T Bill’s pay 2.65% and the 2yr is 2.85%. Both yields are more than the 2% Fed inflation target and provide a positive inflation adjusted return. Competition now exists for stocks and foreign bond investors.

Some experts believe the Fed has pushed the funds rate up too far and too fast. Consensus earnings for the SPX are expected to be $162 for 2018 and $178.30 for 2019 according to Yardeni Associates.

That gives us a 16.79 P/E multiple this year and 15.2x multiple on 2019 earnings at a 2720 SPX index level. This is not expensive, but confidence is slipping for next year's numbers.

According to FactSet:

"As of Oct 29th, almost half (48%) of the companies in the S&P 500 have reported earnings for the third quarter. Of these companies, 77% have reported actual EPS above the mean EPS estimate, which is above the five-year average of 71%. In aggregate, earnings have exceeded expectations by 6.5%, which is above the five-year average of 4.6%. Due to these positive EPS surprises, the earnings growth rate for the S&P 500 has improved to 22.5% today from 19.3% on September 30.”

Given the strong performance of actual earnings relative to analyst estimates and the improvement in the earnings growth rate over the past few weeks, how has the market responded to positive EPS surprises during the Q3 earnings season?

Companies in the S&P 500 that reported positive earnings surprises for Q3 have seen a decrease in price of 1.5% on average, from two days before the company reported actual results through two days after the company reported actual results. Over the past five years, companies in the S&P 500 that have reported positive earnings surprises have witnessed a 1.0% increase in price on average during this four-day window.

If the final percentage for the quarter is -1.5%, it will mark the largest average price decline over this 4-day window for S&P 500 companies reporting positive EPS surprises since Q2 2011, which was down -2.1%.

This translates simply to the fact that our market had more than fully discounted this wonderful earnings season by September.

We have moved from #TINA, There is no Alternative, to #TINPTH, There is no Place to Hide market.

If the October drop was a classic correction in an ongoing bull market, we will likely recover the lost ground quickly. If tariff policies, weak foreign economies, and higher interest rates give rise to rising inflation expectations and falling GDP we may have seen the peak in stocks for this cycle.

We are however, entering the strongest part of the calendar year. From November-April stocks tend to rise much more than during May-October periods. Additionally, post midterm election years are historically good market years.

Time will tell if history repeats, rhymes or becomes irrelevant. In our opinion, trade policy and future Fed actions are the most important and impossible to predict factors.

If you wish to review your portfolios or your investment goals please call or email us for a conference or meeting.

Don't forget to vote, it is our right and our privilege as Americans.

Doug Coppola

John Coppola

Communication is for informational purposes only & doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current, or complete, and such information is always subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written about the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.

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