October 30, 2018

This October has been the worst market month since February of 2009, meaning it has been the worst market month of this entire bull market – barring a huge rally in the last three days of the month.

After telling us that October has been the #1 stock market month over the last 20 years, Bespoke Investment Group now tells us that this October is among the worst 8 or 9 Octobers of the last Century.

But here’s a shocker. Last April 30 on my college alumni Website page, I made a bet with a stock bear that the S&P 500 would be higher on October 31 than it was on April 30. He gave me all the standard bearish arguments, including the “coming recession” mantra, the “Sell in May and Go Away” rap, and a bit of “Trump Derangement Syndrome” thrown into the mix. We bet a gentleman’s $1 on the outcome.

I’ll bet you think I lost that bet, since the market is down so far in October, right? Maybe so, but not through last Friday. On April 30, the S&P 500 stood at 2,648.05, and on Friday, October 26, it was 2,658.69, up 10+ points. Anything can happen tomorrow, but we had five good months before October.

What changed in October? Growth is still good, earnings are good, the jobless rate is still ultra-low, inflation is low. Could it be…. Politics? Contentious election rhetoric? The Fed raising rates, despite low inflation? Tariffs increasing, slowing global growth? Possibly. Or just algo-traders doing heavy selling?

Market analysts are currently predicting that S&P 500 earnings will grow 22.6% this year, 10.3% next year, and 9.5% in 2020 to $195 per share. Which number in that scenario justifies a market sell-off?

One warning flag is the buildup of inventories in the third-quarter GDP figure, implying that a lot of companies are stockpiling imports before tariffs kick in. After the elections, the President and his team need to get serious about negotiating with China. More specifically, China needs to get serious about negotiating with us, because the U.S. has refused to resume trade negotiations until Beijing comes up with some concrete proposals regarding technology transfers, tariff inequalities, and ongoing product piracy.

President Trump and China’s President Xi Jinping are scheduled to meet in late November as part of the Group of 20 in Buenos Aires. Unless they make progress there, the U.S. could raise tariffs on $200 billion on Chinese imports to 25% (from the current 10%) on January 1. In the end, the U.S. can outlast China in any trade standoff, but everyone will lose if both sides don’t lower the steep tariffs on international trade.

The Economist Predicts “The Next Recession” (When None is in Sight)

It’s always comforting to me to see best-selling books about “the coming crash” or negative magazine covers, since they are so often wrong. That’s one reason I like to reprint those book and magazine covers here. It’s encouraging to know that the bears are out in force making their argument and that the argument is popular enough to sell books and magazines to a nervous public. The President may not be able to build a Wall on our southern border, but the bears are constantly able to build a higher, stronger Wall of Worry.

The philosophy behind magazine covers is that they encapsulate the popular fears that dominate our inner angst, if not our outer, spoken conversations. Books and magazines never hope to change our minds. They merely hope to reflect our inner fears more accurately, to capture a reaction of “Yes, at last! Somebody understands what I’ve been trying to say!” The purpose of a cover is to capture the eyeballs of a passing pedestrian in a busy train station, airport, subway station, bookstore, coffee shop, or other emporium and separate them from $5 or so, in order to generate a longer-term subscription to their struggling little rag.

Over the years, many magazine covers have marked turning points in the markets. In late 2009, The Economist sported a cover, “Brazil Takes Off,” shortly before Brazil began to fizzle and implode. A couple of weeks ago, The Economist may have made a similar blunder, asking how bad the “Next Recession” will be at a time when the next U.S. recession may be shallow and at least two years off. 

The Economist editors’ main “recession’ concerns are that the Fed and the Treasury are not prepared enough for the next recession, since the Fed still has a bloated balance sheet and Congress is running up a large annual federal budget during boom times. These are legitimate concerns, especially the latter, but the Fed is gradually reducing its balance sheet and President Trump is determined to cut spending in the Swamp and to never sign a bloated spending bill again. (We’ll see if he can keep this promise in the next two years, especially if Democrats take control of the House.). The Economist says America, and indeed the entire developed world, “is ill-prepared to deal with even a mild recession. That is partly because its policy arsenal is still depleted from fighting the last down-turn.” This is true, but we do have some time to rebuild that arsenal before the next recession, by making the right policy decisions in the next two years.

The bigger question is: Why are the editors of The Economist writing about a coming recession when the economy is cruising along at a 3.5% growth rate? There is time to do the right things. Even the Economist editors admit that: “The good news is that banking systems are more resilient than a decade ago, when the crisis struck. The chance of a downturn as severe as the one that struck then is low.” Unfortunately, that kind of balanced and positive conclusion never finds its way into the headlines or the magazine’s cover.

P.S. Here’s what happened to Brazil’s GDP from 2010 to 2015 and how the Economist’s covers changed:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*

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