Risk-off Sentiment Seems to Dominate Amid Global Stock Market Sell Off

October’s volatility isn’t showing any signs of letting up as risk-off sentiment appears to set the tone for today.

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Key Takeaways

  • Caterpillar beats on earnings, revenue, but noted rising costs; 3M misses on top and bottom line

  • Pressure on Wall Street Tuesday morning after Asian, European shares sell off

  • Verizon, McDonald’s beat expectations on top and bottom line results


(Tuesday Market Open) October’s volatility isn’t showing any signs of letting up as risk-off sentiment appears to set the tone for today.

Wall Street seems to be following an overnight selloff in Asian and European shares. Trade tensions appear to continue to be a dominant worry among market participants, and that was underscored after Caterpillar (CAT) blamed tariffs for helping to push up its manufacturing costs. Italian budget worries and tensions surrounding Saudi Arabia also appeared to darken the mood.

Before the pace of selling accelerated overseas, trepidation ahead of earnings appeared to weigh on the U.S. market Monday as nerves have already been frazzled by higher interest rates, continuing trade tensions and coming elections.

This morning’s equity weakness has spilled over to the bond market, sending the rate on 10-year Treasuries down 6 basis points.

Rates Rising Along With Economy

Amid the worry about how rising interest rates might affect the stock market, it’s probably worth remembering that the Federal Reserve appears to be on its track of gradual tightening because of strong economic growth.

Because of their mandate, central bank policy makers are focused on the economy’s overall health. Sometimes, just like when you’re driving a car, things can start moving too fast and you need to tap the brakes. In that scenario a bit of a slowdown is a good thing. The same can be true for the economy if monetary policy makers think things are getting a bit too hot and economic activity is causing prices to rise too quickly. On the other hand, if they see the economy starting to falter, the Fed might pause its course of interest rate hikes. 

A wild card still appears to be whether trade tensions could impact economic growth enough to cause a meaningful enough slowdown in the pace of economic expansion that would prompt the Fed to enact such a pause.  

Earnings Season In High Gear

Heavy equipment maker Caterpillar (CAT) reported adjusted earnings per share of $2.86 on revenue of $13.51 billion, topping third-party consensus expectations of adjusted EPS of $2.85 on revenue of $13.29 billion. In the same quarter last year, adjusted EPS were $1.95 on revenue of $11.41 billion. 

But the industrial bellwether said rising steel prices and tariffs helped drive up manufacturing costs. CAT shares were down around 7% in pre-market trading.

3M’s (MMM) shares were also down more than 6% in pre-market trading after earnings and revenue results fell short of expectations and its guidance disappointed. 

These results could point to a slowdown outside the United States that could also affect tech stocks.

Looking across the pond, shares of Austrian semiconductor manufacturer AMS AG, a major supplier to Apple (AAPL), fell more than 20% on 4th quarter guidance that apparently failed to meet analyst expectations. 

Ahead of the open, Verizon (VZ) and McDonald’s (MCD) represented two green spots in what looked to be a sea of red. Both beat expectations on top and bottom line results

Among other companies reporting later this week, Boeing (BA) reports before market open on Wednesday, Microsoft (MSFT), Ford (F), and Advanced Micro Devices (AMD) report after market close the same day. Twitter (TWTR) reports before the open on Thursday while Snap (SNAP), Amazon (AMZN) and Alphabet (GOOGL) all report after the close the same day.

Figure 1: View From Above: With all the ups and downs the stock market has been seeing recently, maybe now is a good time to remind ourselves of where we are along a longer timeline. Although the S&P 500 (SPX), shown in candlestick format, is down this month, the broad market index is up more than 2% year to date, as of Tuesday morning. A similar story is true for the Dow Jones Industrial Average ($DJI), shown as a blue line, while the Nasdaq Composite (COMP) is up more than 6% so far this year. Data Source: S&P Dow Jones Indices, Nasdaq. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.    

The Growth-Value Pendulum: Choosing between value and growth stocksis one of the myriad choices long-term investors have in how they diversify their portfolio. It looks like investors have recently been choosing value stocks over their growth counterparts, investment research firm CFRA said in a note last week, pointing to the outperformance of health care, energy, and industrials in September and increasing net inflows into value exchange traded funds in Q3 compared with the first half of the year. Even though it’s normal for there to be back-and-forth between the two styles of investing, and investors have moved more into value and out of growth in three different months this year before October, “this time around the rotation may be receiving heightened attention given the impressive multi-year run in growth, with questions of its sustainability,” CFRA said. “The valuation differential between growth and value also has some considering that it might be value’s time to shine.” 

According to the research firm, earnings growth prospects are in favor of growth stocks while valuation is in favor of the value names. However, a look at price performance in the 12 months after midterm elections from 1978 to 2014 shows that S&P 500 growth stocks tended to outperform value names. Further, since 1980, S&P 500 growth stocks have tended to have better price returns than the broader S&P 500 more frequently than their value counterparts six months before, during and after bear markets and corrections, the CFRA note said.

Data Watch: The big economic report of the week, the government’s first estimate of 3Q GDP, is expected to show slowing economic growth, even though the outright level of more than 3% expected by a consensus of economists provided by Briefing.com is still fairly robust. A question could be whether whatever the number comes in at will be enough to make Federal Reserve policy makers rethink the current trajectory of gradual rate hikes. GDP data are due Friday. New home sales for September are due out tomorrow, and could be closely watched after last week’s slumping housing numbers.

October Tends to be Volatile: The volatility we’re seeing now is pretty typical of October trading. While some of the selling arguably is because of rising rates, it could also be part of a broader rebalancing that is serving to get some froth out of a stock market that only recently had been hitting all-time highs. The stock market isn’t the economy, and vice versa. But it’s also true that individual companies can perform better during times when consumers are confident about their jobs and spending power. So it’s arguable that the same economic tailwinds that are causing the Fed to raise rates and prompting some investors to sell defensive government bonds, pushing up Treasury yields, are good for stocks in the long run even though higher rates mean corporate and investor borrowing costs move higher. 

Good Trading, 

JJ

@TDAJJKinahan 

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Economic Calendar for this week. Source: Briefing.com
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