VOL. 130 | NO. 196 | Thursday, October 8, 2015
The Worldly Investor
A September to Forget
DAVID S. WADDELL | Special to The Daily News
September typically delivers negative performance, and this September was no exception. September’s poor performance punctuated a dismal third quarter. Using MSCI stock indices, the USA, Europe and the emerging markets fell 7 percent, 9 percent and 18 percent respectively. Feeling down? You are not alone…
Investors Singing the Blues. According to a recent release from Investors Intelligence, the number of bullish financial advisers has retreated from 57 percent in April to 25 percent today. At 25 percent, today’s bullish sentiment runs below the 26 percent registered in March of 2009 and just above the 22 percent coinciding with Lehman’s collapse. According to Goldman, retail investor sentiment sits at zero on a scale of 0 to 100 and has held at zero for seven of the last eight weeks, the longest stretch in the measure’s eight year history. The last time the index held at zero? 2011…
Let’s Hope it’s 2011. In 2011, after a jarring decline in August that bled into a September retest, the S&P 500 finished September down 8.5 percent for the year. Ironically, the 2011 decline pattern correlates closely with the decline pattern to date in 2015. In 2011, the S&P 500 continued its decline into early October, reaching a low of -13 percent on the year. Post the October low, the S&P 500 rallied strongly, closing the year out essentially flat.
We currently stand 12 percent lower than our May 2015 peak. Have we bottomed? Unclear, unfortunately. Labor data released last week depicts some deterioration in job market momentum, reinvigorating concerns that offshore economic weakness may wash onshore. However, U.S. consumption and housing data have been strong, as have consumer confidence measures.
Recall that the U.S. economy grew 3.9 percent in the second quarter. Economic odds makers ascribe a less than 10 percent probability of recession. Fully formed bear markets (20+ percent declines) accompany recessions. Corrections (10+ percent declines) without recessions happen statistically almost annually. What could turn the tide? If realities exceed expectations…
3Q Earnings. Third-quarter earnings season begins next Friday. According to Factset, across the S&P 500, revenues will decline 3.3 percent, profit margins will decline 0.4 percent, while earnings will decline 4.5 percent. With expectations like those, no wonder the market is falling!
However, low expectations increase the chance for upside surprise. Should earnings releases and guidance clear low hurdles, we could collect a Santa Claus rally … a la 2011.
Bottom Line: Markets have rerated growth expectations and lowered valuations across the board in a classic correction pattern. Corrections may occur annually on average, but the last one this bull market produced arrived in 2011. Markets fell in an eerily similar patter, then rallied into 2012. However, before we rally we must bottom.
Two data points could lead to terra firma. First, earnings season begins next week and will build momentum into mid-month. Second, China will release third-quarter GDP figures on Oct. 18. Should China and U.S. corporate earnings realities step over the lowered expectations bar, you might find a rally in your stockings. Keen market observers call October the Bear Killer for a reason.
David Waddell is president and CEO of Memphis-based Waddell & Associates.