Sunday, October 28, 2018

The Selloff – Is it Fundamentals or Market Dynamics?

By Roy C. Smith

Well its October, and that’s when the stock markets’ worst selloffs occur. With the change of seasons there comes an effort to rethink the year ahead. Stock prices, after all, are meant to reflect the future, not the past.

We had a selloff at the beginning of this year, a reality check on some of the Trump tax-cuts-and-deregulation euphoria, but the market turned around and found new highs by September. This was supposed to be because strong second and third quarter growth and corporate profits and other economic fundamentals were strong enough to justify stock price increases. The Economist now predicts US GDP growth for the year to be 2.9%, with unemployment at 3.7%. 

A few weeks later, market went into correction mode, driving prices down 10% from the most recent highs. Did the fundamentals change all that much in a month?

Fundamentals are fundamental so they don’t change very fast. After a decade of strong stimulus from low interest rates, easy money, quantitative easing, increased government spending and some deregulation, all boosted by a late in the game tax cut, the economy gradually dug itself out from the wreckage of the Great Recession and saw annual GDP growth rates approach the 3.0% level for the first time since 2005.  Things were looking quite good compared to the past decade, but the long-term average US GDP growth rate is 3.5%, so even 3% is well below average. And, most economists are forecasting lower growth over the next two years. The Federal Reserve for example, is predicting GDP growth of 2.5% in 2019 and 2.0% for 2020. 

Economists will tell you that the fundamentals are actually in trouble. The labor force is not growing fast enough to sustain 3% growth - the Department of Labor predicts average annual growth in the US labor force of 0.2% for 2015-2025, down from 1.2% from 1980-2015. Total Factor Productivity, which is now less than 1%, averaged 1.9% growth from 1947 to 1970. Inflation has risen to about 3% in 2018, from 0.76% in 2014, a long-term decline in interest rates has been reversed (10-year Treasury bond yields have increased to 3.1% from 1.6% in 2016), and domestic capital investment is flat from a year ago. 

US corporations have skillfully managed around some of these obstacles by globalizing their complex supply chains, importing skilled workers from Europe and Asia, and locking in low cost debt. Foreign companies have helped with major investments in manufacturing and distribution facilities to serve markets in the US, but they too face the problems of sagging fundamentals. Twelve-month revenue growth of the S&P 500 companies declined from 7.9% in July 2018 to 6.6% in September 2018. Much of the corporate profits growth was from the lower tax rate and the Trump trade and immigration policies will likely slow growth and increase inflation further in the years ahead.

Periodically, market dynamics have more to do with stock prices than fundamentals.  These dynamics essentially reflect the changing supply and demand for stocks. They involve everything from changes in asset allocation into or out of stocks, changes in foreign funds flows (foreigners now own 22% of the US equity markets after a recent two-year buying spree), the appeal of growth stocks relative to value (the price differential between the two is the greatest since the tech bubble in 1999), corporate stock repurchases and mergers, changing sectoral concentrations in market indices (the technology sector now accounts for 21% of the S&P 500 index), and changes in the portion of the markets represented by ETFs and passive funds (now about 40%). 

After 2009, when the long bull market began, investors significantly increased allocation to stocks to avoid low bond yields. Foreign investors did too, but also to avoid lower growth rates at home and enjoy the stronger dollar. The “momentum” in the markets has been highly focused on tech stocks, despite a doubling of price-earnings ratios since 2009, just as it was in 1999 when Alan Greenspan called it “irrational enthusiasm.” After the 2017 tax cut, corporations increased their purchases of own-company shares to record levels, expected to be about $1 trillion in 2018. Merger activity and a slowdown in IPOs reduced the number of public companies in America and therefore the supply of different stocks available for purchase. And, every time someone buys shares in the popular S&P 500 index fund (SPY), the fund has to buy additional shares of 500 companies. Once such changes start to stir in a global equities market of $80 trillion (US share, $32 trillion), money can move quickly into and out of things, and liquidity flows have their own price effects.

Market dynamics had a lot to do with providing much better returns than could be explained by economic growth in the US after January 1, 2009. From then until now, US annual economic growth has averaged only 2.04%, but the total return (including dividends) of the S&P 500 index fund, after adjusting for inflation, averaged 13.4% for the same period. It is hard to imagine how the value of 500 of the largest companies in America can have increased six and a half times faster than the growth rate of the economy these companies principally serve.  

But as we learned in October 1929, 1987 and 2008, market dynamics can suddenly take away some of what it had so generously provided in preceding years. But these dynamics have their own fish to fry – retirement, insurance, endowment and other institutions and wealthy investors still need to own stocks, and yields on ten-year Treasury bonds after inflation and taxes are still close to zero. US companies, sweetened by a lower tax rate, are performing well, and everything is relative. Would you rather have all your money in Europe or Japan, or China? 

22 comments:

  1. Secure I AM routinely cover a 20 mile radius from Oldham, We also cover other towns and cities outside our normal catchment area, however additional charges may apply. Secure I AM install and maintain Intruder alarms and Bolton systems

    ReplyDelete
  2. This is a splendid website! I"m extremely content with the remarks!. white biotechnology

    ReplyDelete
  3. Because they no longer need to travel to make a Pound of Weed purchase of medical marijuana. Wherever they are, they can place an order safely from their mobile phone, tablet or pc.

    ReplyDelete
  4. Casino via online, merupakan suatu permainan yang dapat membuat anda bermain beberapa permainan yang telah melingkupi casino online .

    ReplyDelete
  5. Her high isn’t just immensely powerful but it combines the best of sativa and indica into a smoke experience that really couldn’t be any better. girl scout cookies strain.She gives a uplifting and euphoric high like that as you can get from the best sativas but mixes it with an awesome indica stone so she’s really delivering the best of both cannabis worlds in one awesome smoke!

    ReplyDelete
  6. White runtz carts, this indica dominant cannabis strain is the nero cut edition, it’s a cross between zkittlez and gelato. Nero is part owner of the runtz brand. white runtz strain. Chronic carts white runtz, The white runtz strain is basically runtz covered in THC with the same sweet taste.

    ReplyDelete
  7. psychedelic education Monthly MAPS donors sustain our work and support year-round psychedelic research, drug policy reform, public education, harm reduction,
    peer support, and general operations.

    ReplyDelete
  8. Why You Should Put Your Trust in Vetoquinol to Improve Your Animal’s Health Vétoquinol is a veterinary pharmaceutical laboratory that develops over 700 veterinary medicines for both livestock and companion animals. Vetoquinol products are sold buy horse and camel supplies .

    ReplyDelete
  9. The DMT vape pen .As we discussed above the facts and effects, here we provide you the best quality of MDMA Powder so that we assure us to you be a permanent customer of bestplugshop. Given below are the important points for you so kindly check it ones.

    ReplyDelete
  10. The 4-aco-dmt pellets utilize significantly more careful, which is a significant in addition to when you understand that the administration treats this life-sparing substance as what might be compared to split or heroin. The medication has a fast beginning and a moderately brief term. DMT vape pen.In spite of the quick acting nature of this medication, it’s additionally one of the most “extreme” substances accessible.

    ReplyDelete
  11. A safer way to lose weight is to cut calories while increasing your daily activity level. When cutting calories, where to buy redotex .You’ll find it easier to get your essential nutrients and feel full with fewer calories

    ReplyDelete
  12. Tidak hanya itu saja, sudah jelas dari jenis permainannya sangat aman digunakan. situs judi bola .Karena memang joker123 dan juga pragmatic play adalah provider paling terkenal dan juga sudah lama terverifikasi secara resmi

    ReplyDelete
  13. นอกจากนี้ทีมดีไซน์ของทางบริษัท ยังให้ความสำคัญกับฟังก์ชันโซฟา ที่ช่วยเสริมความสะดวกในการใช้งาน โดยใส่ลูกเล่นลง โซฟาเบด ไปในโซฟาเบด เพื่อที่จะช่วยทำให้คุณได้ประโยชน์ในการใช้งาน ยกตัวอย่างเช่น

    ReplyDelete
  14. Tahsis ücreti, kredi kullanımı için bir kereye mahsus kredi kuruluşu tarafından tahsil edilecek sıfır araç kampanyaları olup kredi ve finansman şart ve seçenekleri Borusan Otomotiv Premium ile çözüm iş birliği içindeki kredi kuruluşu tarafından sağlanmaktadır.

    ReplyDelete
  15. Antes de comenzar a embarcarte en el increíble viaje hacia la verdadera iluminación en la ley atraccion es importante que comprendas que puedes aplicarla a su vida y que puede ser muy eficaz si se utilizan las herramientas adecuadas.

    ReplyDelete
  16. Shop the koala print best personalized gift ideas for love. Make any occasion special with a personalized gift, free personalization, ast shipping.

    ReplyDelete
  17. Welcome...To DUMP99.IN Dumps With Pin Shop Online.Yep We know you have alots right now- All your problems will be solved from this digital money.- You can pay for your entertainment, your vacation with your lover, anything you want. dumps credit card for sale as WE said, the limitless possibilities are hidden. You need to unlock them by buying dumps with pin. Surprisingly,

    ReplyDelete
  18. TSD hydraulic bolt tensioner can withstand a maximum working pressure of 150MPa, which can stretch most bolts.
    Hydraulic Bolt Tensioner

    ReplyDelete
  19. You’re in the right place! Gymnasts can improve their skills at home with the help of home equipment. Your child can improve her skills faster by practicing at home thanks to the power and repetition – without having to spend more money in the gym. gymnastics equipment

    ReplyDelete
  20. Kelebihan lain dari bandar togel resmi Bandung toto yaitu diskon togel yang diberikan cukup besar untuk setiap pemasangan angka togel 2d, 3d dan 4d. situs judi togel online

    ReplyDelete
  21. Selbst unter den sicheren, seriösen deutschen Sportwetten anbietern gibt’s hinsichtlich der Qualität gewaltige Unterschiede. Wir wollen dir einen Leitfaden an die Hand geben sportwetten

    ReplyDelete
  22. สล็อต เว็บไซต์สล็อต สล็อตออนไลน์ ยอดนิยมแล้วก็เป็นที่ชอบใจเป็นอย่างมากสำหรับผู้เล่นเกมสล็อตออนไลน์ในช่วงเวลานี้ PG SLOT นับว่าเป็นที่น่าดึงดูดช่วยทำเกมให้กับผู้เล่น24ชม.

    ReplyDelete