No Quarter

No quarter.  Markets took no prisoners yesterday as equities continued their recent rout with some indices erasing all of their 2018 gains.  Investors have been dealing with the convergence of many pent up fears regarding the economy and the markets, many of which reared their heads yesterday.  Yesterday’s pre-market earnings were pretty much on par with earnings so far in which S&P500 companies have produced a 20% year over year growth on average.  While the 20% growth is slightly slower than last quarter’s, it is still high and largely expected.  What was not expected was lighter guidance given for future quarters.  More and more companies are referring to the headwinds caused by the trade war and higher rates.  Sound familiar?  It is only a matter of time, and while earnings are still growing they will start to slow down.  It’s in the math!  Texas Instruments announced earnings after the close on Tuesday and their earnings call warned of future slowdowns in future earnings.  TI, a chip manufacturer, is part of the semiconductor industry, which also happens to be a leading indicator of the tech sector.

So the day started with a weak semiconductor group, which probably sparked some tech selling.  Before the market opened, AT&T announced its earnings and missed its target by -4.5% which was bad enough.  The loss was compounded by their admission that they had lost wireless subscribers causing a selloff in the stock.  As investors started to parse through releases, New Home Sales was released and it showed a month over month slowdown of -5.5%, far worse than the expected -0.6%.  The release reminded investors that higher interest rates can affect growth, which added to the negative mood in the market. So it was the common themes of: trade war, future earnings worry, China slowdown, higher interest rates, and an aggressive Fed that ultimately led to the negative mood.  Throw in a bunch of bomb scares, a weak treasury auction, and a bunch of irate long-only asset managers on TV and you get a selloff.  The charts?  Well they don’t look great and when animal spirits enter the markets, as they did later in the session, the rules don’t apply.  All of the major equity indices are risk off.  What does it all mean to us?  It is always important for investors to remember their investment objectives.  Specifically the level of risk they are comfortable with and their time horizon.  In fact, smart investors working with their advisors should re-examine their goals often and a selloff such as the one we have been experiencing brings that into sharp focus.

Rather than focusing on the daily ups and downs investors should be thinking long term.  If your time horizon is shorter because you are close to retirement or you are saving to make a large purchase in the near future, your investments should be in a lower risk category with less volatility.  If you have a longer time horizon, as many of us do, you need to remember that a long term approach to markets always pays off.  In fact, an examination of the S&P500 returns from 1926 through 2011 showed that investors only holding for three-year periods could have made as much as 31% and lost as much as -27%, which are not great odds.  If an investor held for 10 year periods, the greatest potential return was 20.1% while the greatest potential loss was only -1.4%, which are much better odds.  So long term pays off.  See the attached chart which shows the ranges of S&P500 returns over different holding periods.  This chart always makes me feel better after days like yesterday.

Today we will get another round of economic releases starting with trade and Durable Goods Orders.  Durable Goods Orders are expected to have receded by -1.5% after last month’s increase of 4.4%. Later this morning we get Pending Home Sales, which is expected to be flat month over month compared to last month’s -1.8% slowdown.  This indicator tracks real estate contracts that have been signed but not yet closed.  In this environment and after yesterday’s weak housing number, you can bet that today’s number will be closely watched.  Today, we will also get 71 S&P500 companies reporting.  Before the market we will receive a broad range of industries and after the market we will get some tech heavyweights.  While equity markets show signs of firming up in overnight trading, today’s session will feature similar stimuli to yesterday’s which means another volatile day ahead.  Stay focused on your long term goals.

daily chartbook 2018-10-25

long term