David Ross

What I think I learned last week #47

Stock markets have struggled in October. Want to know why? Here is the reason: So far this quarter, 35% of the 85 reporting S& P 500 companies have missed Wall Street analysts’ sales forecasts, according to FactSet. You can also add rising interest rates to the explanation as three-month US T-bill interest rates rose to a ten year high of 2.33%.

On Tuesday’s big stock drop, the New York Stock Exchange saw 1256 stocks hit 52-week lows with only 21 hitting new highs. Oil joined in the fun, as it also had its biggest one-day drop in 3 months on Tuesday.

On Wednesday’s big stock drop, the S&P 500 and Dow Jones Industrial average erased all of their gains for the year and the Nasdaq went into a correction as it suffered its worst day in seven years by dropping 4.4%.

Most stocks are in a correction, even if the index is not. The S&P 500 has had 353 stocks drop 10% or more from their 52-week highs, and 179 of those have fallen by more than 20%.

In a bad sign for markets, asset management firms have seen their stock prices tumble. Blackrock, the largest asset manager in the world, is down 17% in October. State Street has fallen 19% while T.Rowe Price has dropped 13%.

As if that were not enough, transportation stocks went into a correction, joining banks, an ominous sign for the economy and future market gains.

France’s CAC closed at the lowest level in more than a year while Italian shares hit 1½ year lows and Spanish shares ended at their weakest level since late 2016.

It was so bad in the markets that even marijuana stocks stumbled, falling the most in two years.

The good news is that sudden stock market selloffs rarely become bear markets. Violent drops like the one in October usually see a recovery within six months and a rally within one year.

Tough time in Toyland as Hasbro reported a 12% drop in sales, resulting in a 9% drop in its stock price.

No candy for the children either as Hershey’s stock price fell 6% after reporting a sharp slide in profit margins due to higher shipping costs.

Hold the line: AT&T missed expectations and saw its stock price also drop 6%.

French IT services firm Atos lowered its 2018 revenue guidance, based upon disappointing results in Germany and North America. Its stock price plummeted 17%.

French carmaker Renault saw its shares drop sharply as revenue fell by 6%, more than expected. While emerging markets were the big problem, Renault also issued warnings over key European markets, including Germany, Britain and Italy.

Ryanair, Europe’s largest budget carrier, suffered another profit drop, its third straight quarterly earnings decline. Encouragingly (not), the CEO predicted that many airlines would struggle to operate. He said, “You will see more failures this winter as we enter what is probably a four-five year downturn in the industry.”

It was a difficult week for beer. The world’s largest brewer, Anheuser-Busch InBev reported weak profits and slower sales, resulting in it cutting its dividend in half and the stock price dropping 11%. One of the hottest summers on record and a World Cup and the world’s largest brewer can’t sell beer?

Continuing the theme of a bad week for beer, it was a difficult time for beer in Iceland. Last week, US military troops landed in Iceland ahead of the start of the largest NATO military exercise since the Cold War. Local media estimate that 6,000 and 7,000 US military personnel deployed “overwhelming force” against Iceland’s beer supplies.

Also having a bad time in the NATO exercise were Dutch soldiers sent to Norway. Their government forgot that it is kind of cold in Norway in November and did not have any warm clothing for them. Instead they gave the soldiers some money to go buy their own clothes. That is military preparedness!

It was a difficult week for semiconductors. Austrian chipmaker and Apple supplier AMS had it biggest drop in over a decade on Tuesday when shares plummeted 32% on a proit miss. Texas Instruments reported below-expected sales and provided a disappointing forecast, causing the biggest slump in its stock price since January. Fellow chip maker AMD forecasted that the next quarter’s revenues would be below estimates due to crumbling crypto mining demand and saw its stock plummet. Intel, however, did report good numbers, as did Xilinx.

Amazon reported huge third quarter earnings, but its revenue and fourth quarter guidance left investors uninspired and the stock dropped more than 7%.

Visa put a charge in its stock price by topping profit estimates and giving a solid outlook on consumer spending.

Microsoft grew its revenues by 19%. Not bad for a company that did $29 billion in revenue. This quarter. Microsoft passed Amazon to become the 2nd largest company, by market capitalization, in the world.

McDonald’s put an earnings beat on the menu and its stock jumped 6%.

Even Tesla drove its profits higher, reporting an actual profit, positive cash flow and bigger-than-expected margins for the quarter. This was its first profitable quarter in two years.

South Africa slashed its growth forecasts in half, lowering its expected 2018 growth from 1.5% to 0.7%.

The initial GDP reading for the US showed a solid 3.5% growth rate.

Trump continued to attack his Federal Reserve Chairman, saying Jerome Powell threatened the US economy and appeared to enjoy raising interest rates. Trump described his push for growth as a competition with former President Obama’s record, saying that economic growth under Obama was skewed because of low-interest rates.

Former Fed Chair Janet Yellen, in a Financial Times interview, stressed her concern about deteriorating corporate loan standards, especially the loosening standards in the $1.3 trillion market for leveraged loans.

Finally, congratulations go out to US Treasury Secretary Steve Mnuchin as he is going to set the record for selling the most US government debt by any Secretary of the Treasury. The previous high for the refunding sales was set nine years ago during the financial crisis by then-Treasury Secretary Tim Geithner. Way to go!

And that’s what I think I learned last week.