Market Update

October can be a scary month for stocks. Famous crashed of 1929 and 1987 happened that month. While there was nothing similar in magnitude this October, wave after wave of relentless selling produced another correction this year (the first one was in February). One can point to a number of fears contributing to market decline: fear of tariff wars, fear of rising interest rates, fear of peak earnings, fear that the current bull market may be nearing its end, and, most recently, fear of falling oil prices (which is normally a good thing, but could indicate a slowdown in the economy).

Short term market behavior is dictated by such fears on the way down and by hopes on the way up. A number of pros and cons for these fears can be provided at any stage of the market, but in the end fundamentals always determine the price. Currently, forward PE ratio stands at very reasonable 15.5, below 5 year average of 16.4, but above 10 year average of 14.5. So far this year, S&P 500 is essentially flat, while earnings rose more than 20%, and so the market is considerably cheaper than it was at the beginning of the year. In the third quarter, earnings rose some 25%, and so the fear of peak earnings is correct that such rate is not sustainable. However, in 2019, earnings are still expected to rise by 9-10%, and sooner or later the market will have to follow.

The current correction may end tomorrow or it may continue and turn into a bear market (a decline of 20% from the top, we are halfway there). There is no way to know. The good news is that corrections and bear markets are short lived, and are always followed by advances that take the market to the new highs.