Some quick Market comments
I published this quick not today for my firm. It short and sweet, hope you enjoy.
The Fed continues to warm everyone up for a higher Fed Funds rate:
KAPLAN: FED NO LONGER NEEDS TO BE STIMULATING U.S. ECONOMY
MESTER: LABOR MARKET IS `PRETTY STRONG,' COULD BRING UP PRICES
So why does the 10 year languish barely above 3%?
ECB’s Draghi says continues to expect key interest rates to remain at present levels at least through summer 2019 – speech
Survey shows ECB seen ending negative rates in 2020 after liftoff next year – Bloomberg
BOJ governor speaks in interview with Bloomberg in Bali, will keep current rates for now given inflation around 1%, he stressed that policy settings will remain at their current rock bottom levels for now.
The ECB and the BOJ are currently swinging a much larger bat than the Fed. As long as their existing policies stay in place look for increases in interest rates to be a slow march. However if these overseas monetary policies change toward tightening, what we have seen from equity markets this October will be child’s play. Growth stocks (like FANG) will not trade at triple digit multiples in an environment where major Central Banks are all in tighten mode.
Crude Oil spent a couple of weeks above $70 (WTI), reality has returned and we are back at ~$66. Look for oil to stay right around this level for the time being, why?
“The drop came amid a persistent concern about global growth/demand trends as well as Saudi assurances that it would "meet any demand that materializes to ensure customers are satisfied."
So with interest rates up just a bit, oil quiescent and earning season going well, why did the market correct some 8%? Here is a possible explanation:
There are some pretty big speed bumps in the road ahead. As we look ahead at the path of S&P 500 earnings, we see two basic structural problems. First, the growth rate is poised to decelerate, something that is often accompanied by weakness in the S&P 500. Current sell-side estimates are calling for slower EPS growth in 3Q18 and 4Q18 than 1Q18 and 2Q18, with further deceleration into the single digits in the first half of 2019 (note that many investors we speak with have been getting worried about tough comps in 1H19 as the benefits of tax reform are lapped). Second, back half 2018 expectations are already in the process of being revised lower. 2H18 S&P 500 EPS estimates have been trimmed, with 3Q18 falling from 22.6% to 21.1% and 4Q18 slipping from 18.5% to 18.1%. Conditions are the same for revenue growth, with signs of a slowdown in the growth rate in place and further downward revisions underway.
Finally desiring high income securities but nervous that rising rates will make that a dangerous investment? Consider BDCs (Business Development Companies), there are many to choose from. Typically all of their assets are floating and their debt is mostly fixed. Therefore higher rates will actually benefit their income. Many yield 10% or higher and can be bought in the market for a significant discount to tangible book and at single digit multiples. Might make sense these days to move out of that Internet Company trading at 300x earnings and replace it with a value name and a high yield. Our fund invests in a broad range of these securities. Feel free to reach out if you would like more information about BDCs.