2018 Third Quarter
“OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.” – Mark Twain. While we may have witnessed some extremely large down days during the month of October in years past, regardless of which month you choose investing in stocks is not without risk.
As we enter the month of October, volatility is starting to pick up once again. Many are blaming the interest rate increases on both the short end (the Federal Reserve) and on the longer end (the 10-year treasury rose to a yield of 3.221% in the first few days of October). One can easily imagine newly retired investors selling risky investments like stocks and purchasing a “sure-thing” FDIC backed short-term CD or prime money market as these yields become more attractive. For example, Schwab’s Value Advantage Money Market is now yielding 2.01%. I also believe we are seeing some profit taking – especially in the FAANG stocks that have driven the market over the past several months and years. FAANG is the acronym for Facebook, Amazon, Apple, Netflix and Google (now Alphabet). Investors are also beginning to think about increased debt financing costs for individuals, corporations and governments and their impact on the domestic economy. As we already know, consumers will be paying more for their mortgages, corporate bonds will become more expensive for companies to issue and state governments will have to pay more to service their maturing debt. Investors are anticipating higher rates will eventually translate into an economic slowdown.
The thing that bothers me is that the Federal Reserve announced months ago that they would most likely be increasing interest rates and it goes without saying that expectations for longer-term interest rates would be higher all along. However, when we finally saw part of the increase, the stock market acted surprised at the event and a sell-off ensued. There must be more to this story than what meets the eye and I believe that is where the trade war with China comes in along with some increased tensions with Saudi Arabia. I overheard one financial firm has a 20-year China trade war “game plan” in place and the disappearance of the Washington Post reporter Jamal Khashoggi threatens to strain US and Saudi Arabian relations. While I am a skeptic as to how quickly these situations will be resolved, I also recognize that patience is important. In the last few days, P/E (price-to-earnings) ratios have fallen as stock prices have dropped. As of October 15th, we are now looking at a forward P/E of 17.08 for the S&P 500 compared to 19.39 at this point last year. A lower P/E ratio means stocks are cheaper. Let’s keep an eye on third quarter corporate earnings and projections in the weeks ahead.