The Rabid Capitalist

Professor Glenn A. Okun

N.B.: This is premium content that I have made available to everyone as a belated Halloween treat.

The Rabid Capitalist described September as a turbulent month for equities in a previous note. While September lived up to its reputation as the worst month of the year for the stock market, October provided fuel to the sell-off. The appetite for risk has been further diminished. Is this a short-term phenomenon?

The Market Monitor confirmed September’s readings. The bearish tone remained.

The Magnificent Seven, the market leaders over the intermediate term, have suffered fatigue. This sluggishness has spread over many speculative, high-potential growth segments of the stock market.

A not so magnificent year

The Magnificent Seven have failed to provide leadership during the last year. Most of the Seven have struggled.

These leaders have experienced valuation multiple compression. There is a wide range in analysts’ consensus earnings per share growth estimates for a set of firms that operate in a related set of industries. This is disconcerting since the industry typically provides fifty percent of firm investment returns.

The Magnificent Seven have relinquished their long-standing leadership position. The XMAG, an ETF containing the other 493 stocks in the S & P 500, beat the Seven over the last year.

The twenty high-potential growth sectors tracked by the Rabid Capitalist have suffered, jointly and severally. Their collective performance over four, twelve, twenty-four and fifty-two weeks is negative at month-end, wiping out the mid-year gains. Over the last quarter, individual growth themes weakened consistently, with the July period losers extending their declines and the winners giving back some of the gains. Even cybersecurity stocks, September’s standout sector, stalled during the month.

Earnings Forecast Or Surprise?

Third and fourth quarter earnings calls will serve as the next important stock market catalyst. Analysts have positioned the second quarter earnings as an outlier. Quarterly earnings expectations have declined broadly.

A stock market move, a correction or rally, will ensue. If analysts’ estimates prove accurate, then stocks will be recognized as expensive and will decline. However, if firms surprise to the upside, then a market rebound should be expected.

Investors have embraced a reduced risk posture. Enthusiasm for the speculative will require fresh catalysts that can be supplied by firm financial results as well as geopolitical and economic events. These are double-edged swords, capable of creating consensus expectations of optimism or pessimism. Long-term investing remains viable at this time.

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