Mark Nov. 2 on your calendar – the October employment report could be the trigger for the next major down day for the market.
Tim Chubb, CIO of Univest Wealth Management, told Yahoo Finance that an “extremely” strong October employment report and hotter inflation reads in the weeks ahead may spark the next major down day for stocks.
With the job market continuing to fire on all cylinders, there is little reason not to expect a very solid October report.
Chubb’s logic goes something like this: strong economic growth numbers today could keep the Federal Reserve on its path of continuing to steadily raise interest rates. But the Fed would be hiking rates based on the past strong growth rates of 2018.
Recall it was a combination of strong economic data and inflation fears that sent the Dow crashing about 1,600 points at one point on Feb. 5. The Dow closed the session down 1,175 points, marking its worst one-day point performance in history.
“Good news is bad news right now because there are fears the Fed will act too aggressively,” Brent Schutte, chief investment strategist of Northwestern Mutual Wealth Management Company, tells Yahoo Finance. Schutte, whose firm has $135 billion in assets under management, thinks many in the market believe Fed Chairman Jerome Powell has “blinders” on with respect to monetary policy.
Nevertheless, growth rates in 2019 stand to be weaker amid geopolitical turmoil, tightening labor markets and the effects of the U.S.-China trade war. Goldman Sachs sees 2019 GDP cooling to 2.6% in 2019 from 2.9% this year. It forecasts a heavy dose of five interest rate hikes next year.
That combination of higher rates, stronger inflation and slowing U.S. growth is potentially lethal to corporate profits. Sprinkle in reduced effects of the Trump tax cuts, and well, one can put the pieces together on how the market would act.
Indeed, Schutte’s good-news-is-bad-news take on market sentiment is already taking shape.
The Dow Jones Industrial Average tanked more than 400 points Tuesday morning as investors completely ignored stronger-than-expected third-quarter earnings from household companies such as Caterpillar and Harley-Davidson. Companies that have reported strong third-quarter numbers also continue to be dumped.
As Richard Bernstein Advisors portfolio manager Dan Suzuki wrote: “Following the spate of headlines in August declaring this the longest bull market of all time (itself a questionable statistic), investors seem ready to cash in their chips and call it a day, especially when the market dips.”
Bring on the bad news…the market could use it.
Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi