Rising Rates, Earnings and the Wall of Worry
We’ll, it is October after all. Halloween is almost upon us, as traders tip toe through arguable the most feared month of the year for market participants. There have already been a few tricks, as market volatility rises.
In a potentially ominous sign for stocks, the surge in Treasury yields early in the month was mostly driven by a jump in the inflation-adjusted yield. Traders keep a close eye on real yields because they’re a clue to how much the Fed’s interest-rate increases have tightened financial conditions.
Of course real yields tend to climb during periods of growth, but an accelerated rise can be a threat to businesses accustomed to comparatively cheap credit. With the 10-year real yield breaking above its five year trading range, that could mean trouble for stocks. Worried? Click here
So far, earnings season has traders on the edge. Investors will be sifting through piles of earnings announcements for the next two weeks as the third-quarter reporting season accelerates. More than 150 companies are on tap to announce financial results. Total Q3 earnings for the S&P 500® Index are expected to be up 17.6% from the same period last year on +7.3% higher revenues. That would be the 6th time in the last 7 quarters of double-digit earnings growth.
As a reminder, here’s a table identifying the percentage of names in each index that is reporting, arranged by trading week.
As world economic and geopolitical events continue to build the wall of worry, even Wall Street’s “smart money” is skeptical as we trade deeper into Q4. According to Bloomberg, Mike Wilson at Morgan Stanley urged investors to stay put, calling rallies such as last Tuesday’s (10/16) “a dead cat bounce.” Technology and consumer-discretionary stocks, market leaders in the past few years, may need to fall an additional 6 percent to 8 percent before bottoming, he said. In the same article, Goldman Sachs’ David Kostin advised caution, noting that Midterm elections are likely to be a source of volatility, too, as Democrats capture the House, setting the stage for battles over regulations and spending.
Typically during this stage of an election cycle, market volatility usually picks up as uncertainty on policy builds. Once the outcome of the voting is known, stocks stage a rally, with the S&P 500 rising an average 8 percent in the fourth quarter, according to Bloomberg.
What about this time? Will it be different? Who knows? Only one thing’s for sure: Traders, especially leveraged ETF traders, need to stay in front of their screens.
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