- Markets remain in correction mode in spite of excellent earnings from such diverse names such as Microsoft, Boeing, McDonalds, Tesla, Xilinx and Twitter, and upbeat economic data with reports on both the manufacturing and services sectors topping analysts’ forecasts.
- Worries about corporate revenue peaking and a slowdown in China and Europe potentially spilling over into the U.S. economy, and of course trade and tariffs pressuring corporate earnings, have sent stocks into a tailspin. Growth stocks, particularly those internet related, have been some of the hardest hit during the market downturn.
- It hasn’t helped that quarterly sales from Amazon.com and Google parent Alphabet disappointed investors even though both companies far exceeded earnings estimates, sending the two stocks lower in Friday’s session and pressuring the tech-heavy Nasdaq Composite to its worst week since March.
5-day returns to 29 October 2018
|Local currency||AUD currency|
|WTI Oil||US67.59 (-2.20%)||N/A|
|Treasury (10 year)||3.07% (-12bp)||N/A|
We have previously mentioned that market retracements of more than 3% average at least three a year. On the chart below is the average retracement (numbers in red) per year compared to the annual return since 1980. It also makes the point that since 1980 intra-year declines have averaged 13.8% but annual returns have been positive over 70% of the time (29/38 years).
What should investors do?
Macrovue is a strong believer that equities are a long- term investment. Minimum holding periods should be 5-7 years. Investors (as opposed to traders) need to have the patience to ignore the noise around market corrections (particularly from the media) and realise that drawdowns are a natural if not regular occurrence in equity markets. Focus on company fundamentals (which remain positive) not prognostications from so called market “pundits”.
Also, since 1950, there have been 7 other years that were positive YTD going into October and saw the S&P 500 turn negative YTD during October. The good news is the final two months of the year were higher 6 out of 7 times and up 4.1% on average.
Notable U.S. economic stats this week
U.S. 3Q GDP
The U.S. economy powered ahead in the third quarter, driven by robust consumer and government spending. Gross domestic product grew at a 3.5% annual rate from July through September to $18.7 trillion. That came after a 4.2% growth rate in the second quarter. That represents the strongest two quarters of GDP growth since 2014.
Earnings So Far
According to FactSet, with nearly 40% of S&P 500 having now reported, blended growth rate for Q3 S&P 500 earnings stands at 20.9%, up a full point from yesterday and still on track for third best reading since early 2011 (following back-to-back 25% growth in Q1 and Q2). In addition, 82% have reported results above the consensus nicely above the one-year average of 77%. In aggregate companies are beating earnings estimates by 4.7%.
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