After a fruitful September for investors, they now need the complacency beaten out of them, say many Wall Street pros.
That painful beat down could come within the last three months of this year as investors realize the harsh realities of a simmering U.S. trade war with China extending deep into 2020. Some of those realities include rising costs of doing business for Corporate America (which pressures profits more than investors currently believe) and a new wave of political trade rhetoric from the Trump administration (which injects doses of headline risk back into stocks).
Think along the lines of the December 2018 market massacre, episode two.
“We have said for a while that the fourth quarter of 2019 would repeat what we saw in the fourth quarter of 2018. It is predicated on a resolution with China and what we see out of the UK. We continue to see macroeconomic data weaken across on the board. On a micro level, we are seeing it in the companies we are following as well,” Diamond Hill Capital Management John McClane said on Yahoo Finance’s The First Trade.
McClane continued, “We could easily correct 15% to 20% from here. The market sentiment is that low rates are good for equities and at a certain point we are going to start to say that low rates mean low growth. I really think the market is sick at this point and we have mis-diagnosed the patient. Quantitative easing isn’t really going to matter much in terms of pumping up the economy.”
Forget the holiday 2018 market massacre? Allow us to jog your memory because it was downright ugly. The S&P 500 and Dow plunged 13.9% and 11.8%, respectively, in the fourth quarter as trade war fears and concerns of further Federal Reserve rate hikes walloped equities. The riskier Nasdaq Composite blew up to the tune of 17.5%, market is the largest three month decline since 2008.
Rate cuts may help
If there is any consolidation this year is that the Fed has already cut interest rates twice. Moreover, Jerome Powell & Co. have signaled more rate cuts could be in the cards if the macroeconomic data continues to sour. That has some on Wall Street in the camp of no major fourth quarter market correction.
But rather, a mild pullback.
“Always possible but we are not in that camp,” says SunTrust Chief Markets Strategist Keith Lerner. “We certainly could get another gut check before year end. We have had only two S&P 500 pullbacks of 5% this year versus an average of about three historically. However, we wouldn’t expect anything in the magnitude of the selloff from last year and generally remain positive on equities. (The two primary risks would be rising tariff escalation or rising recession concerns.).”
Lerner points to fourth quarter seasonal factors generally being in the favor of the bulls: Since World War II, the S&P 500 has risen 78% of the time in the fourth quarter.
In other words, sleep with one eye open investors. The rawhide belt is never too far away.