Frightful October

Interest Rates and Revenue.

In the face of rising interest rates and an aggressive Fed, corporate revenue guidance for the fourth quarter has come in below expectations. These factors have combined to put the stock market into a tailspin. As corporate revenues decline (or grow more slowly), stock prices begin to look more expensive. Last month the ratio of price to revenue was the highest since the dotcom bubble of early 2000. Stocks have lost 10% of their value from the high in September, putting them in “correction” territory. They would need to lose another 10% for it to be considered a “bear market” and put an end to the current decade-long bull market since the Great Recession.

Economically, most economists are predicting growth for another year to year and a half before we enter the next recession. In the meantime we will most likely see continued volatility through the mid-term elections and then more normal trading sessions through the end of the year. It is expected the market will take another leg up prior to retreating heading into the next recession.

At HWM, we are closely monitoring indicators of the stock and bond markets and will move aggressively to mitigate account losses. One of the indicators we are looking at is the yield curve (a graph of interest rates from short-term CDs to long-term bonds). An "inverted yield curve" is a reliable indicator of an impending recession. As stocks or other risky assets become less desirable investors move into more stable investments of treasury bonds (typically longer-term bonds where the yield is greater). When this happens in conjunction with rising short-term interest rates (yields), you may get a scenario where, say a 2-yr bond is paying more than a 10-yr bond. When people are willing to lock up cash in a lower-yielding fund for longer periods of time, then they don't have much faith in the near-term outlook. The current yield curve is still "normal" looking but it is flattening. So far the canary in the coal mine is still alive but it may not be singing.