The big fear spooking investors

What's behind the October stock scare? A variety of market forces joining together to threaten investors' po...

Posted: Oct 25, 2018 8:52 PM
Updated: Oct 25, 2018 8:52 PM

What's behind the October stock scare? A variety of market forces joining together to threaten investors' portfolios.

Blame the fallout from the US-China trade war. And fears of a slowdown in corporate earnings. Don't forget about jitters caused by rate spikes, Federal Reserve policy and geopolitical turbulence.

Asia

Banking, finance and investments

Business, economy and trade

China

Continents and regions

East Asia

Economic conditions

Economic growth

Economic policy

Economy and economic indicators

Financial markets and investing

Government organizations - US

Interest rates

International trade

Monetary policy

North America

Securities trading

Stock markets

The Americas

The Fed

Trade and development

Trade regulation and policy

Trade wars

United States

US federal departments and agencies

US government independent agencies

Economic decline

Recession

But in the end, these storylines all speak to an overarching concern: Is this as good as it gets? Are the best days of this historically long business cycle -- both for stocks and the economy -- in the rearview mirror?

Despite Thursday's sizable rebound, the S&P 500 is on track for its worst month in eight years. The market plunge reflects waning optimism about economic and profit growth. Wall Street is increasingly worried both will slow as the recovery from the Great Recession ages, the sugar rush from tax cuts fades and costs rise.

"At least for now, things are probably as good as they're going to get," said Kristina Hooper, global market strategist at Invesco.

That sudden realization has led investors to rush out of high-flying tech stocks and pile into the relative safety of utilities, cash and bonds. The Nasdaq's 2.7% rally on Thursday is only enough to recover a chunk of Wednesday's 4.4% plunge, the index's worst day since 2011. Former darlings like Netflix (NFLX), Facebook (FB) and Amazon (AMZN) have all been knocked down.

"The euphoria genie -- always a warning signal -- is back in the bottle," Greg Valliere, chief global strategist at Horizon Investments, wrote to clients on Thursday.

Recession jitters hit banks

Tech and other risky corners of the market aren't the only sectors getting crushed. Banks, which are very sensitive to swings in the economy, are in a deep slump. Big banks, known as universal banks, have declined about 15% on average since mid-September, according to Keefe, Bruyette & Woods.

That steep selloff reflects investors starting to price in a "shallow economic recession," KBW wrote in a report on Thursday. While the firm doesn't see an "imminent" recession, it warns that such a downturn could cause bank earnings to tumble by 12% in 2019 and 20% in 2020.

The market is not betting the economic expansion is over. But investors are acknowledging the growing risks posed by the US-China trade war, the Fed's interest rate hikes and inflation. The IMF set the stage on October 8 when it downgraded 2019 GDP projections for both the United States and China.

Profit warnings and dividend cuts

Corporate America added fuel to the fire, with some major companies sounding a more cautious tone about the future. Investors were unnerved on Tuesday when Post-It maker 3M (MMM) slashed its outlook and Caterpillar (CAT) issued disappointing guidance. Harley-Davidson's (HOG) US sales plunged 13%.

Although some companies like Tesla (TSLA) and Whirlpool (WHRL) have soothed investor fears, others are amplifying concerns that rising prices will eat into record-high profit margins. For instance, Sherwin-Williams (SHW) dimmed its outlook on Thursday due to higher costs.

And other companies are reminding investors about the vast amount of debt piled up during the era of low interest rates.

Debt-riddled Anheuser-Busch Inbev slashed its dividend on Thursday, and some analysts say General Electric (GE) may soon do the same to repair its balance sheet.

Wall Street may get a fresh reminder of the growth slowdown from Friday's GDP report. Economists surveyed by Refinitiv estimate that US growth slowed to 3.3% in the third quarter. While that is still impressive, it would mark a deceleration from the second quarter's 4.2% surge.

Officials at the Federal Reserve are anticipating the economy will lose further steam ahead. The Fed is calling for 2019 GDP growth of 2.5%, followed by 2% in 2020 and 1.8% in 2021.

Dialing back expectations

It's possible the warnings from Corporate America force the Fed to scale back its plans to raise interest rates several more times over the next few quarters.

There's already evidence that the Fed's rate hikes are raising borrowing costs in two industries that heavily rely on credit: autos and housing.

"The Fed may begin to take the foot off the gas pedal," Hooper said.

Then again, Fed chief Jerome Powell will not want anyone to think he is folding to political pressure from President Donald Trump, who recently called the central bank "my biggest threat." And the Fed needs to acknowledge that tariffs are inflationary.

None of this means that the bull market, already the longest in American history, is over. Yes, the bull run is starting to show signs of old age. But it doesn't need to be on its death bed.

The US economy is still cruising along better than most of its peers. And Corporate America is still making gobs of money, albeit perhaps at a slower pace going forward. Investors are coming to terms with that.

"Expectations are more realistic," said Valliere. "Some air has seeped out of the bubble, and that's a good thing."

Terre Haute
Clear
61° wxIcon
Hi: 73° Lo: 42°
Feels Like: 61°
Robinson
Clear
60° wxIcon
Hi: 80° Lo: 40°
Feels Like: 60°
Indianapolis
Clear
60° wxIcon
Hi: 68° Lo: 44°
Feels Like: 60°
Rockville
Clear
49° wxIcon
Hi: 71° Lo: 43°
Feels Like: 49°
Casey
Clear
54° wxIcon
Hi: 75° Lo: 43°
Feels Like: 54°
Brazil
Clear
61° wxIcon
Hi: 71° Lo: 42°
Feels Like: 61°
Marshall
Clear
59° wxIcon
Hi: 76° Lo: 42°
Feels Like: 59°
Turning Cooler
WTHI Planner
WTHI Temps
WTHI Radar

WTHI Events

 

Illinois Coronavirus Cases

(Widget updates once daily at 7 p.m. CT)

Confirmed Cases: 293448

Reported Deaths: 8881
CountyConfirmedDeaths
Cook1446975221
DuPage17690562
Lake16992487
Will14133379
Kane13182326
St. Clair6729190
Winnebago6069151
Madison5802141
Champaign478920
McHenry4625118
Peoria352651
McLean330523
Rock Island303777
Kankakee276477
Unassigned2542244
Sangamon245045
Kendall203425
Tazewell179525
LaSalle174257
DeKalb160438
Macon159844
Coles148831
Williamson141647
Jackson126724
Clinton120321
Adams118310
Boone113623
Randolph94511
Effingham8792
Vermilion8174
Whiteside76521
Ogle7326
Monroe68616
Knox6803
Grundy6775
Morgan67223
Henry6695
Bureau65911
Jefferson62438
Marion5692
Christian56011
Macoupin5567
Franklin5483
Stephenson5356
Union52024
McDonough49115
Logan4661
Crawford4594
Woodford4286
Fayette4243
Livingston4066
Shelby4024
Cass39811
Jersey39515
Lee3911
Montgomery38213
Iroquois36719
Perry35415
Saline3504
Bond3346
Warren3332
Douglas3167
Wayne2935
Jo Daviess2692
Lawrence2592
Carroll2335
Greene23011
Hancock2233
Moultrie2194
Cumberland2185
Richland2176
Washington2171
Jasper21210
Fulton1880
Pulaski1811
Clark1763
White1690
Johnson1620
Wabash1603
Clay1570
Mason1541
Mercer1415
Piatt1410
Pike1391
De Witt1272
Menard1271
Massac1132
Edgar1128
Marshall1090
Ford1075
Alexander841
Scott790
Gallatin742
Hamilton732
Henderson700
Brown670
Edwards660
Calhoun610
Putnam590
Stark552
Schuyler500
Hardin390
Pope291
Out of IL20

Indiana Coronavirus Cases

(Widget updates once daily at 8 p.m. ET)

Confirmed Cases: 119066

Reported Deaths: 3612
CountyConfirmedDeaths
Marion21563768
Lake10745324
Elkhart6734112
St. Joseph6679115
Allen6364205
Hamilton4965109
Vanderburgh384231
Hendricks2779124
Monroe267137
Tippecanoe259013
Johnson2362125
Clark226757
Porter222447
Delaware201162
Cass19589
Vigo187928
Madison171475
LaPorte151941
Warrick140743
Floyd140464
Howard133964
Kosciusko127117
Bartholomew119357
Marshall102124
Dubois100919
Boone99746
Grant96636
Hancock94843
Noble92932
Henry82226
Jackson77610
Wayne77314
Morgan73940
Shelby68329
Daviess68129
Dearborn67928
LaGrange64711
Clinton63414
Harrison59824
Putnam59011
Gibson5455
Knox5379
Lawrence51829
Montgomery51321
DeKalb49111
White48814
Decatur46139
Miami4394
Greene42936
Fayette42314
Jasper4032
Steuben3977
Scott39311
Posey3541
Sullivan33812
Jennings31712
Franklin31525
Clay3105
Ripley3108
Orange28724
Whitley2876
Carroll28013
Adams2773
Wabash2758
Starke2737
Washington2702
Wells2694
Spencer2683
Jefferson2523
Huntington2503
Fulton2462
Tipton22922
Randolph2238
Perry22213
Jay1920
Newton17411
Owen1711
Martin1690
Pike1691
Rush1584
Vermillion1320
Fountain1302
Blackford1223
Pulaski1141
Crawford1100
Parke1072
Brown1033
Benton860
Ohio797
Union790
Switzerland690
Warren411
Unassigned0227