Market Review October 2018

Don’t call it a bear market…yet. October was a month which started out with reason for celebration, with markets reaching record high numbers. However, this positive sentiment didn’t last long, and a swift correction soon followed. Everyone is now asking the question, are markets headed into bear territory?

October’s Falling Knife. Is it Over?

October came and went, but not without bringin one of the worst trading months in recent history. On the month, the NASDAQ fell close to 9%, the S&P lost 7%, and the Dow Jones faltered by 5%.

Ralph Acampora, a technical analysis expert, explained why the current market is so troubling. “I was waiting for a correction but this is something different,” said Acampora. “All the leadership is getting crushed. Honestly, I don’t see the low being put in yet and I think we’re going to go into a bear market.

Luckily, a two-day rally pushed the market back in the right direction. The Dow gained 673 points during the last two days of the month ending at 25,115. Quelling fears of an impending bear market. The short rally was led by Facebook and General Motors, both of whom reported better than expected earnings to inject optimism in the market.

Tech Stocks Lag

One of the worst sectors hit by this most recent market decline is technology. Tech stocks in the S&P 500 were lower by almost 2% more than the rest of the index. A large reason for this is because of high valuations on technology companies which have been inflated over recent months. Price-to-earnings ratios on some of the industry’s biggest companies, such as Amazon (forward P/E of 65) and Netflix (forward P/E of 84) are currently valued extremely high compared to their expected future earnings, even for growing technology companies.

We saw for over two years how the market bowed at the altar of Amazon, Apple, Alphabet, Microsoft, and Facebook.  Breadth was weak, signs of deterioration showed up almost everywhere, yet it was all covered up by five stocks. Now, they’re broken.

Awaiting the Midterm Elections

Election season is upon us, and it isn’t just the political sphere which is closely watching key local races. There are significant economic implications of the results of the upcoming November elections, which are likely to affect tax cuts, government spending, and more. While the Republicans hold both the House and Senate, there is no telling how many seats in Congress will shift to the Left, causing a major upheaval in political power.

If Republicans manage to hold on to both the House and Senate, even if by a slim margin, stock prices are likely to see a short-term increase. Alternatively, Democrats have been vocal about their disdain for President Donald Trump, and major victories for the party could lead to further political clashes in Washington, and even talk of impeachment.

The Eurozone Falters

While the fear of a potential bear market in the United States is significant, over in Europe there are plenty of causes for concern as well. The Eurozone grew a paltry 0.2% over the third quarter, half of analysts expectations. In fact, Europe was the fastest growing region in the developed world just one year ago.

Factors causing this slowdown stem from high inflation levels in Germany, a Eurozone country usually viewed as the stabilizing force of the region. Inflation in the country reached a six-year high at 2.4% during the month. To add insult to injury, Chancellor Angela Merkel announced she would not run for re-election in the upcoming political cycle. Merkel has always been a stabilizing force in the Eurozone, and her exit leaves more than enough uncertainty for investors to be concerned.

Could Gold be on the Rise?

As the global markets brace for what could be an impending bear market cycle, gold stands to benefit. Yet gold has still not found its footing in 2018, sliding to about $1,159 per ounce in the summer. During the falling market of October prices have worked their way higher to about $1,225 per ounce.

A poll taken at the London Bullion Market Association’s annual gathering expects the price of gold to grow over the coming twelve months by close to 25% to $1,532 an ounce by this time next year.

General Electric Falters

Once the quintessential American company, General Electric (GE) is experiencing some of its darkest days. The industrial conglomerate saw its stock price drop by 10% in a single day after it reported underwhelming third-quarter numbers. This report also revealed a massive 92% cut to the company’s dividend, a cut which outpaced previous reports.

As a result, Moody’s downgraded GE Capital’s credit rating from A2 to Baa1. Said Moody’s of the action: “The downgrade reflects Moody’s view that the adverse impact on GE’s cash flows from the deteriorating performance of the Power business will be considerable and could last some time. The weaker than expected performance at Power is not only attributable to a considerable drop in market demand and ensuing heightened competition, but also to GE’s misjudgment of financial prospects and operational missteps.”

The company is searching for a way to save its business by stockpiling cash and building for the future. GE is creating a spinoff of its GE Healthcare division, one in which the parent company will hold an 80% stake. Additionally, its aviation business is continuing to see rapid growth as a direct result of increased demand for air travel. Amidst these troubling time, GE could be a turnaround company for 2019.

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