Red, red, red everywhere today.
Caterpillar (CAT) and 3M (((MMM) disappointed on guidance. China and Europe sold off. As did the financial sector with the Financial Select Sector SPDR ETF (XLF) falling 0.77% to $25.90 to break or at least test support.
And, then, as if the market needed another burden Saudi Arabia announced that it had boosted oil production to 10.7 million barrels a day and was losing in on a new all-time high in production. The Energy Select Sector SPDR ETF (XLE) was down 2.64% on the day.
What’s important at this moment is to separate the lasting damage from the transitory new bad news from the old bad news.
I’d put the breakdown in the financial sector in the category of lasting damage. Next to technology the financial stocks make up the biggest sector in the market. If these stocks are locked into a downtrend, it’s hard to see a sustained rally–as opposed to aa bounce. The sector ETF is down from a September 20 high at $28.98 to 25.90 at today’s close. That puts the sector solidly below the 50-day moving average at $27.89 and the 200-day moving average at $28.02. With an interest rate increase by the Fed looming on December 19 (which should help bank stocks but hasn’t) and with big bank earnings behind us (and without those earnings reports helping the sector), I don’t see a near term positive catalyst for the sector.
Brexit troubles and the Italian budget crisis hang over stocks–as does the U.S.-China trade war. Those problems will get solved “someday” but at the moment it’s very hard to put a finger on the calendar and identify that someday. That means that many trading sessions in New York will start with investors and traders knowing that Asian and European markets are down. The Chinese government is moving to shore up Chinese stocks–now trading at a four-year low but rebuilding confidence in that market will take time.
In this atmosphere the negative news on guidance out of Caterpillar (CAT) and 3M (MMM) stoked fears that the third quarter has seen peak earnings. That’s quite possibly true, but even with lower guidance from many companies, the market will eventually remember that while the fourth quarter earnings growth rate may be lower, earnings growth in the quarter is still likely to fall between a very strong 15% and an absolutely great 20% year over year. In other words, lower guidances after earnings reports should produce a valuation correction but absent some huge growth dip–possible in 2020 if predictions of a recession have any validity–we’re not looking at the bottom falling out of this market yet. What we’re seeing instead is a big move from risk to less risk.
And finally, Id put the Saudi production announcement in the category of old news (and note that it’s exactly what a country facing global outrage at the murder of a journalist inside the Saudi consulate in Istanbul would say to remind the world of how important it is and how good an energy partner it is.) The Saudi’s have been ratcheting up production month over month since June at least. What’s always been important about these announcements of new levels of production is the question of how much higher Saudi production can go. The consensus is, Not much higher. Which means that a drop in the price of West Texas Intermediate of 4.44% to $66.28 a barrel and of Brent crude of 4.33% to $76.37 a barrel is a short-term over-reaction that has as more to do with the difficulties in projecting global demand in 2019 and 2020 than it does with actual increases in Saudi production. If my take on this is current, a bounce in oil stocks is the first bounce we’ll see in financial markets.
