What are you asking for? After all, the Dow Jones Industrial Average rose 104.35 points or 0.4% to 25444.34 last week, while the S & P 500 rose 0.65 points to 2767.78 and even the Nasdaq Composite only rose by 0 , 6% finished at 7449.03.
But the latest numbers refute the volatility that challenged investors throughout the week. The Dow started the week lower, rising 548 points or 2.2% on Tuesday, slipping 327 points on Thursday and not over 200 points on Friday. There were many reasons for the wild drive, ranging from Italy's confrontation with the EU over its budget to China's slumping economy and a collapsing stock market to concerns over higher interest rates. "There are a number of idiosyncratic risks," says Vinay Pande, head of short-term investment opportunities at UBS Global Wealth Management. "If you have idiosyncratic risk, you usually do not have sustained volatility, you have episodic spikes."
But we prefer to focus on corporate profits. At first glance, they were not that bad. Around 72% of companies that have reported earnings so far have outperformed over the last 20 years, according to the Bespoke Investment Group. But the good news ends there. Only 58% of companies beat sales expectations, the weakest in six quarters, and the reaction to earnings is even worse as the average US stock dropped 0.7% on the trading day following its release. And the sky forbids a company, in which case they have fallen on average by 5.7%. "We see investors selling the news, whether they're good or bad," says Bespoke co-founder Justin Walters.
There is a good reason for that. As the Federal Reserve raises interest rates, wages rise, tariffs increase costs, and the effects of tax cuts expire, earnings growth begins to peak.
Strategist John Normand notes that growth peaked quarterly in the second quarter of 2018 and peaked on a 12-month basis in the third quarter. If that is the case, the market could be set up for strong inflection: since the early 1990s, equities had only been on average seven months after gains had peaked. "The reason for this tipping point is that it tends to overlap – for a few months – with some of the most significant swings investors make in global portfolios," writes Normand.
The good news, however, is that profits continue to grow, which could help the S & P 500 find a bottom, at least in the short term. Even with a slowdown in earnings growth, the S & P 500 is still trading at a 15.9x 12-month forward gain, up from 16.9x on 21st September. With that he is approaching his long-term average of 15 times rating floor, for now. "There are 15 times fewer risks than at the high end," says Todd Lowenstein, chief equity strategist at Union Bank. "It would make the risk / reward ratio of equities look higher."
Yet, given the long-term prospects that are so uncertain, it is not the worst time to focus on stocks in favor of cash. After all, it's possible to get a non-negligible return on your money that would not have been the case a year or two ago … and those returns are likely to get better. "As a conservative investor, remember that any increase in interest income means you'll get a better return on your cash reserve," said James Stack, president of InvesTech Research, which recommends a 33% allocation to his company's most recent model portfolio.
Safer than Forbearance
Write to Ben Levisohn to Ben.Levisohn@barrons.com