- S&P 500 enters favorable 4-month seasonal period although that October has historically seen some big declines
- ISM non-manufacturing index expected to give back half of Aug’s solid increase
- U.S. factory orders expected to fall
- U.S. announces Airbus-related tariffs after WTO ruling
- PM Johnson’s Brexit proposal may be the starting point for talks but time is short
S&P 500 enters favorable 4-month seasonal period although that October has historically seen some big declines — The stock market made it through September unscathed with a +1.72% advance, shaking off the fact that September is the worst month seasonally with an average monthly decline of -0.46% since 1950.
The stock market has now made it into the most favorable 4-month seasonal stretch of the year. Since 1950, the S&P 500 index has shown average monthly increases of +0.79% in October, +1.57% in November (the best month of the year), +1.46% in December, and +1.02% in January.
The bad news, however, is that we are still in the 4-month (Aug-Nov) stretch of the year that has seen the largest monthly meltdowns. In the past six decades there have been eight times when the S&P 500 has shown a monthly decline of more than 10%. Six of those eight plunges occurred during the dangerous period of August through November.
The worst months, with two 10%-plus plunges, were September (in 1974 and 2002) and October (in 1987 and 2008). The two other bad months, with one 10%-plus plunge, were in August (1998) and November (1973). More recently, the S&P 500 index in Dec 2018 narrowly averted a -10% slide with a monthly decline of -9.18%.
The U.S. stock market is arguably vulnerable to a decline due to recession fears and the fact that valuations are a bit high. The forward P/E for the S&P 500 is currently at 17.9, which is above the 5-year average of 17.7, the 10-year average of 16.0, and the 30-year average of 17.5.
In addition, the S&P 500 index has been in a bull market for the past nine months without a major downward correction. The markets are also nervous about the 4th quarter after last year’s steep -20.2% downward correction in Q4-2018. In the big picture, the S&P 500 has been in a bull market for the past decade with only two corrections of more than 20%, i.e., -21% in 2011 and -20.2% in 2018.
ISM non-manufacturing index expected to give back half of Aug’s solid increase — The market consensus is for today’s Sep ISM non-manufacturing index to show a -1.3 point decline to 55.1, reversing about half of Aug’s +2.7 point increase to 56.4. Meanwhile, today’s final-Sep Sep Markit U.S. services PMI index is expected to be unrevised at 50.9, leaving intact the +0.2 point rise to 50.9 seen in early-Sep.
The markets will carefully watch today’s Sep ISM report to see if the business gloom is spreading from the manufacturing sector to the service sector. The ISM manufacturing index on Tuesday showed a surprisingly large -1.3 point decline to a 10-year low of 47.8, which is well into contractionary territory. Confidence in the U.S. manufacturing sector is now at the worst level since June 2009. The U.S. manufacturing sector is taking a hit from trade tensions, weak overseas growth, the strong dollar, and weak domestic and global business investment.
The only good news is that the non-manufacturing sectors of the U.S. economy are less exposed than the manufacturing sector to trade tensions and are still seeing support from solid U.S. consumer spending. However, even that thesis is now in question with weakening consumer confidence and this week’s weak Sep auto sales reports.
U.S. factory orders expected to fall — The market consensus is for today’s Aug factory orders to show a decline of -0.2% after July’s report of +1.4% and +0.3% ex-transportation. The U.S. manufacturing sector has sunk into a recession and there is little reason for optimism about the near-term outlook for new factory orders.
U.S. announces Airbus-related tariffs after WTO ruling — The U.S. on Wednesday announced that it will slap tariffs on $7.5 billion of EU imports after the WTO in a ruling authorized those tariffs due to improper EU subsidies for Airbus. The U.S. said it would impose a 10% tariff on large commercial aircraft and a 25% tariff on agricultural and industrial goods effective Oct 18.
Wednesday’s new tariffs will further inflame US/EU trade tensions and will make negotiations on a trade deal more difficult. The US/EU talks are awaiting the arrival on Nov 1 of the EU’s new trade commissioner, Phil Hogan, who is being billed as a tough negotiator. The talks have yet to get off the ground since the EU is refusing to accede to the U.S. demand to add agriculture to the talks on industrial products and autos and also because the EU says it will not agree to export quotas on European autos. There is still a strong chance that President Trump will decide by Nov 13 to slap tariffs on European autos to increase the pressure on Europe to negotiate.
M Johnson’s Brexit proposal may be the starting point for talks but time is short — Prime Minister Johnson on Wednesday submitted his Brexit proposal to the EU and again threatened a no-deal Brexit on Oct 31 if the EU does not compromise. The proposal was in line with recent reports with a focus on narrowing the backstop to Northern Ireland and adding a 4-year time-limit and a consent requirement of Northern Ireland’s Assembly. The EU considered the plan a rehash of past ideas and was not impressed. However, the plan might at least provide a basis for more serious negotiations. Time is growing short since UK legislation requires PM Johnson to request a Brexit extension beyond Oct 31 if there is no Brexit withdrawal agreement by Oct 19, shortly after the Oct 17-18 EU Summit.
The betting probability is still low at 20% (4/1) for a no-deal Brexit by the end of 2019, according to oddschecker.com. The more likely outcome is a Brexit deadline extension into 2020 followed by a general election in late 2019.