Week In Brief: November 2nd

Following the previous week’s four percent decline, and the ten percent overall correction, the S&P 500 managed to climb 2.47 percent this week. Shaving some of the October losses. And lending an air of optimism to a pervasively ominous sentiment.

As of last Wednesday, more than 75 percent of stocks in the S&P 500 were 10 percent or more below their highs of the past year. Marking an official correction. The second of the year following February’s -10.02 percent decline. Such circumstances whereby 75 percent of index stocks are in correction has occurred five times since the 2009 bull market began. Three of which quickly formed bottoms. The other two saw further selling in the near term. Ultimately, however, they recorded solid gains over the following two, three and 12 months.

Interestingly, S&P 500 returns went temporarily negative for the year. This has happened after at least 100 days in positive territory only five other times since 1929. In all cases, the benchmark index was up solidly three and six months later. With the best result being an 11 percent gain in three months following the October 19, 1987, Black Monday crash.

Wells Fargo says it is the best time to buy stocks since before the Trump presidency. According to the head of the Wells Fargo Investment Institute, “We believe that this isn’t the end of the cycle or the bull market, and we favor deploying cash now-or even allocating incrementally over the coming days and weeks”, continuing “Current conditions have the potential to create some of the best entry points into equity markets since the November 2016 elections.”

That said, Wells Fargo acknowledged we are at the end of the “easy period” of low volatility and an accommodative Fed.

Most major indexes ended October with their biggest one-month losses in years. Hurt by growing concerns over the health of the global economy. As well as broader concerns about tightening monetary policy. Adding to the confusion are all the signs that the U.S. economy remains on strong footing.

The WSJ last week noted that data reveals Americans’ personal spending and incomes picked up in September. And a Friday report showed the U.S. economy grew faster than economists had expected in Q3.

In only 26 trading days from the September 20 peak through Friday, the S&P 500 dropped 9.3 percent. That ranks in the top 10 pullbacks from a high dating back to 1950. The market has seen a similar return profile during previous bad Octobers. The following table shows the worst Octobers for the S&P 500 going back to 1927. This month’s decline currently ranks as the sixth worst October on record. As shown, November has averaged a decline of 2.83 percent following October declines of 4 percent or more, with positive returns just four out of twelve times, reports Bespoke Investment Group.

So, what happens next?

Sentiment expert Jason Goepfert canvassed his database to determine every time the S&P 500 pulled back for at least 26 sessions from a 52-week high, and focused on the dates with the deepest drawdowns.

The current pullback ranks sixth on that list. You can see in Goepfert’s table below that after the other largest 26-day pullbacks from a peak, the S&P 500 took a median 64 days before it recovered to a fresh 52-week high. Which is a helluva lot faster than we expected.

Most surprising? How positive the aggregate results were in the follow-up six- to twelve-month time frames. Only three signals suffered another eight percent or larger decline at any point over the ensuing six months. But all 10 of them enjoyed a gain of more than eight percent at some point during that same time frame.

Overall, the data suggests that hard, fast pullbacks — like the current one — don’t tend to lead to major bear markets. Instead, most bear markets start with slow declines that lull people to sleep before the floor drops out beneath them.

Bottom Line: This particular data suggests that the current storm remains a normal correction. One that will be surmounted and forgotten over the next six months. Which would be nice. But certainly not guaranteed. The fact that earnings estimates for 2019 are coming down rapidly could place a cap on how much progress stocks can achieve in the next six months.

So, we’ll have to continue to white knuckle through this for a bit. Into November. Through this week’s midterms. But should pragmatism be your guide, there are few other options. Pullbacks happen. They feel bad. Challenge us psychologically. Challenge our fundamental underpinnings. The way we view markets. The world. And ourselves. But short of extenuating evidence alluding to larger, more sinister forces at work, pragmatic investors must maintain a firm grip on the helm. Steer into the big waves. And wait for smoother seas to prevail.

Regarding this week’s election? Whether the Democrats take over the House or not, it is very unlikely U.S. trade policy will materially change. No U.S. politician is going to propose taking it easy on the Chinese government’s trade practices. They may argue with the President’s approach, but not his goals.

Which is to say, don’t expect midterms to ease investors’ minds about the trade wars.

Further, in the unlikely event that the GOP manages to hold the House, there will most likely be a strong U.S. stock rally. Similar to the day after the 2016 presidential elections because investors would positively re-rate valuations in expectation of a continuation of the current pro-growth business environment.

In Europe, UK Chancellor Philip Hammond chose the UK budget to announce a new digital services tax on U.S. tech titans. Clearly not one for music history, he forgets what happened in the 1970s with some of the most iconic rock stars of the time. In the face of 90-percent taxation, the likes of the Rolling Stones, David Bowie, and Ringo Starr decamped to tax enclaves such as Monaco. Why would British authorities expect a different outcome today? They remain in no position to be alienating such big, influential firms. And such blatantly socialist redistributive moves will certainly wield unintended consequences.

German Chancellor Angela Merkel will step down as chairman of the Christian Democrats (CDU) in December. Nor will she seek re-election. This follows a disastrous result in a recent regional election in Hesse. The CDU and its coalition partner in Berlin, the Social Democrats, each lost around 11 percentage points compared with 2013. As the age of Merkel ends, Europe’s most powerful country enters a journey into the political wilderness.

Finally, our hearts go out to Pittsburgh, and especially those in the city’s close-knit Jewish community. Having suffered a needless tragedy at the hands of an ignorant madman. Thankfully, Pittsburgh’s will prove to be like most other Jewish communities who have endured such events in the past. Resilient, cohesive, and uniquely capable of bettering itself in the wake of such insanity. Our thoughts and prayers are with them.

Stay tuned…

Weekly Results
Major indices finished higher last week. The DJIA gained 2.36%. The S&P 500 rose 2.42%. The Nasdaq climbed 2.65%. While small cap stocks gained 4.23%. 10-year Treasury bond yields rose 14 basis points to 3.22%. Gold closed at $1,232.96, down $0.17 per ounce, or 0.1%.