We still have a few weeks until Halloween, but already Wall Street is doing a great job of spooking itself. Between last Thursday, yesterday and today, this has been the worst start to the fourth quarter since 2008.
At this point, I’m sure many of you are questioning whether the S&P 500 and Dow can shake off these early October scares and resume their treks higher. So I took some time yesterday to record a special market podcast for my subscribers. In it, I discussed why the market was so nervous yesterday and what lies ahead over the next few weeks.
Whether you’re a subscriber or not, this podcast has a lot of good information about what’s going on right now, and how we should be reacting to it. So I decided to share it with all of you. You can click the play button below to listen to the podcast.
As I mentioned in the podcast, rising Treasury yields are the main culprit behind the recent market volatility. The 10-year Treasury broke through its seven-year high this week, while the 30-year Treasury was at a four-year high. The reality is that recent Treasury auctions slipped to 2.4-to-1, down from 2.8-to-1, so yields are meandering higher due to fewer bidders.
And until Treasury yields start to fall, the stock market is going to remain very nervous.
Personally, I think that the selling is overdone. People are reacting first, then thinking later. But, at this moment, I don’t know what’s going to ignite a reversal. It could be strong third-quarter earnings or stock buybacks.
On the earnings front, we’re just days away from the start of third-quarter announcement season. Alcoa (AA) kicks things off on Wednesday, October 17, after the market closes. According to FactSet, analysts are predicting that the S&P 500 will post 19.2% annual earnings growth and 7.3% annual sales growth.
These are strong estimates, so it’s my hope that third-quarter earnings season will spark a flight to quality. Normally, when there’s a flight to quality, Treasury yields decline.
So I don’t recommend following the crowds to the exits right now. Yesterday, I advised my newsletter subscribers to sit tight and let our stocks release third-quarter earnings.
What I like to tell my subscribers is that our strongest defense is a strong offense, and that’s especially true during times of market choppiness. Fundamentally superior stocks tend to bounce like fresh tennis balls—they usually recover more quickly than the broader market. And my newsletter recommendations are some of the strongest companies that money can buy right now.
While things are uncertain right now, I still have high expectations for the fourth quarter. And considering your responses to the survey last week, I’d say that many of you agree. Nearly 1,000 of you shared your predictions for the rest of 2018. And the results were very interesting—they helped shed light on how the stock market should perform once we get through this near-term volatility.
So, let’s review those results now.
Results from Last Week’s Predictions Survey
Respondents expect that the stock market will…
- Rally at least 1% through year-end: 84%
- Remain unchanged: 7%
- Decline: 9%
Given the current market, respondents are…
- Buying more stocks: 44%
- Aren’t doing anything: 32%
- Aren’t sure what to do next: 20%
- Selling their positions and going to cash: 5%
The stocks that respondents are most interested in buying right now are:
- Technology stocks like Amazon (AMZN), Apple (AAPL), Fortinet (FTNT) and Microsoft (MSFT).
- Healthcare and biotech stocks like ABIOMED (ABMD).
- Dividend stocks like Boeing (BA).
- Energy stocks.
- Cannabis stocks.
The stocks that respondents are most worried about right now are:
- Chinese stocks like Alibaba (BABA).
- Technology stocks, like the FAANG stocks, Advanced Micro Devices (AMD), Twitter (TWTR) and NVIDIA (NVDA).
- Banking and Financial stocks.
- Retail stocks.
- Energy stocks.
If you’d like to dig deeper into how investors are feeling about the fourth quarter, you can view an interactive report of the survey here. (And, if you haven’t responded to the survey yet and would like to, you can visit the survey here.)
Now, the key takeaway from these responses is that most investors are at least cautiously optimistic about the stock market. This is despite some of the distractions caused by the China trade spat, the political circus in Washington D.C. and interest rate hikes. Further, many investors are buying stocks. The majority don’t have immediate plans to go to cash.
Interestingly, some of the hottest sectors (technology and energy) are also causing the most anxiety. As we saw yesterday, tech stocks, in particular, have caused a lot of heartburn.
These responses largely aligned with the predictions I made in last week’s blog post. Despite near-term distractions and day-to-day gyrations, the stock market still has a strong foundation under it. I’m going to keep a close watch on Treasury bond yields, because they’re clearly spooking the market right now. However, my Q4 outlook remains unchanged. I agree with the 84% of respondents that said that the stock market should finish the fourth quarter higher.
In the meantime, I consider any near-term pullbacks to be buying opportunities. If any of this changes, I’ll keep you briefed through my Market 360 Weekly briefing and my premium newsletters.