What Worries Us?

Today might be Halloween, but the market this month sure has added a new layer to fear—hasn’t it? Unless the S&P 500 Index ends the month with two consecutive green days, this will be the first time in history the S&P 500 has gone the entire month of October without back-to-back gains. That right there sums up how strong the selling has been.

In honor of Halloween, the big question is: What scares us? As we discussed in our latest Weekly Market Commentary, here are three concerns that are keeping us up at night:

Recent U.S.-China trade headlines. We continue to expect a trade agreement of some sort by early 2019, given how much both sides have to lose. But markets are susceptible to headline risk between now and then, and there is always a chance the relationship deteriorates to such an extent that more tariffs will be put in place and potentially become permanent—causing further supply chain disruptions that would likely put added pressure on companies’ profitability.

The Fed could make a mistake. The Federal Reserve (Fed) seems fully committed to further rate hikes. Should long-term interest rates fall due to growth concerns while (short-term) rate hikes continue, the central bank could potentially invert the yield curve, which historically has been a reliable recession signal. With wage pressures building, an uptick in inflation that spooks the Fed in 2019 could be possible.

Stocks have lost technical momentum. The S&P 500 broke below its 200-day moving average on October 11, and that gap is starting to widen, indicating that technical momentum is deteriorating. In addition, we have not seen the type of panic selling that has marked recent major lows, like those in August 2015, February 2016, and February 2018, based on the percentages of stocks that are oversold and put-call ratios, which are measures of bearish sentiment.

Be sure to listen to our latest LPL Market Signals podcast, as Chief Investment Strategist John Lynch discusses each of these concerns in detail.

It isn’t all bad news though.

“Even though the list of worries has grown in October, it is quite reassuring to know that consensus estimates for 2019 S&P 500 earnings per share (EPS) actually increased this month! Call us old school, but we still think earnings drive long-term stock gains, and this is a great sign amid all the market volatility,” explained Senior Market Strategist Ryan Detrick.

As our LPL Chart of the day shows, earnings have been quite resilient during this tough month:

Earnings-Estimates-Have-Increased-During-Earnings-Season

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