Breaking News

5 Key Takeaways From The U.S. Equity Market's Third Quarter

By (Charley Blaine/ 07, 2019 04:54AM ET
5 Key Takeaways From The U.S. Equity Market's Third Quarter
By (Charley Blaine/   |  Oct 07, 2019 04:54AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

The U.S. equity market finished Q3 2019 in modest style early last week. The S&P 500 and Dow gained 1.19% each, but the NASDAQ slipped 0.09%.

The market slumped again as October kicked off, with huge losses Tuesday and Wednesday that were not quite offset by big rallies on Thursday and Friday. The SPX was off 0.33% with the Dow off 0.92%. The NASDAQ gained 0.9%

More significant, there were 5 trends visible in the market's performance that affected stocks during the first week of October, which could influence trading for the rest of the year. Here are the key takeaways:

1. The SPX Peaked in Late July, Has Struggled Since

The S&P 500 hasn't closed above 3,000 since Sept. 19 and is off 2.5% from its intraday peak of 3,027.98 reached on July 26. Meanwhile, it came close to hitting that intraday on Sept. 19 but failed.

SPX Weekly TTM
SPX Weekly TTM

Technically, that's not a good sign. When a stock or index comes close to but fails to pass beyond a recent high, that’s a signal that investors may be skeptical about the rally’s continued strength. In the case of the S&P 500, the macro worries are creating the doubts.

Equally important, stocks may be losing their momentum. At the end of the quarter, the S&P 500 was up 18.7% for the year, but 70% of that gain came during the first quarter when the benchmark index jumped 13.1%. In the third quarter, the SPX fell 0.8%.

2. Geopolitical Forces Pressuring Markets Need to Resolve

Investors and their algorithms have been flummoxed by the contentious, seemingly unending U.S.-China trade dispute. It's now starting to weigh on U.S. manufacturing and other sectors. Negotiations are set to start again next week, but China is proving to be politically resilient.

The tariff tiff has contributed heavily to anemic U.S. economic growth and caused a plethora of angry tweets generated by President Donald Trump which also stresses markets, though he mostly blames the Federal Reserve for ongoing declines. Of course, Trump also forgets that an array of arguably more significant negative drivers are weighing on stocks along with the Sino-U.S. dispute, including depressed farm prices and Boeing's (BA) still pending struggle to get its 737 MAX jetliners back in the air.

Add to that an economic slowdown in Europe, especially in Germany and the United Kingdom, which is also worrying investors. Plus two new issues:

  • The House impeachment inquiry. It will affect the political environment through next year's election.
  • 2020 elections: So many unknowns as yet, but one fear that's surfacing is that Elizabeth Warren could win the presidency and impose new regulations on financial and health care systems, as well as break up big tech.
  • Perhaps the biggest wild card is Trump's tweets, particularly on China and the Fed. They've set off abrupt selling on multiple days this year.

    3. Gains Increasingly Driven by Fewer Stocks, Rotating Sectors

    Consider the Dow. About 54% of the 30-component index's 13.9% gain in 2019 can be credited to just five stocks: Apple (NASDAQ:AAPL), Home Depot (NYSE:HD), Boeing, Visa (NYSE:V) and Microsoft (NASDAQ:MSFT).

    Nearly 59% of the NASDAQ 100's 22.5% appreciation this year is due to gains for Apple, Microsoft, (NASDAQ:AMZN), Facebook (NASDAQ:FB), Comcast (NASDAQ:CMCSA), both classes of Google parent Alphabet (NASDAQ:GOOG), (NASDAQ:GOOGL) and Costco Wholesale (NASDAQ:COST).

    But lately, the uncertainty facing markets has spurred a rotation. As of Friday's close, five Dow stocks are now trading within two percentage points of their 52-week highs: Nike (NYSE:NKE), Procter & Gamble (NYSE:PG), Walmart (NYSE:WMT), Home Depot and Verizon(NYSE:VZ). The average Dow stock is trading more than 10% below its 52-week high. A 10% decline from a peak is the traditional measure of a correction.

    Only 10 NASDAQ 100 stocks have prices that are two percentage points or less from their 52-week highs. Apple is the most prominent at 0.6%. Others include Dollar Tree (NASDAQ:DLTR), PepsiCo (NASDAQ:PEP), Celgene (NASDAQ:CELG) and Charter Communications Inc (NASDAQ:CHTR).

    Microsoft is 3.2% below its 52-week high. Amazon is 14.7% below its all time high, set nearly a year ago.

    4. Housing and Housing-Related Stocks May Be Heading For a Bubble

    This is a tricky call because real estate sales and new construction still haven't recovered from the big construction crash that began in 2007.

    Low mortgage rates, however, seem to have pushed building permits and housing starts to their highest levels this year, despite huge affordability issues in major markets.

    Low rates set off a huge bubble in the early 2000s.

    Homebuilder shares, meanwhile, are soaring. D.R. Horton (NYSE:DHI), PulteGroup (NYSE:PHM), Lennar (NYSE:LEN) and NVR (NYSE:NVR), the four largest by sales volume, are up an average of 50% this year.

    WLH Weekly TTM
    WLH Weekly TTM

    Shares of William Lyon Homes (NYSE:WLH), a big West Coast builder, are up 91%. The S&P 500, on the other hand, is up only 17.76%.

    P/E ratios suggest these stocks aren't overvalued, but gains this big probably can't be sustained.

    5. IPOs Gone Sour: the Uber-Lyft-WeWork-Peloton Problem

    Inevitably, even in overheated markets, there's always a stock or a stock-related event that investors realize is just plain looney, like 2007's $45 billion buyout of TXU, a massive Texas utility by such giants of the buyout world as KKR, Goldman Sachs and Berkshire Hathaway.

    In the case of TXU, when energy prices collapsed, the company became crippled. The audaciousness of the deal was a signal of just how overheated the financial markets had become. Stocks peaked later that year, and of course no one will forget what happened at the end of 2008.

    This year's red flag is highly-touted, extreme-valuation initial public offerings (IPOs) that have stumbled badly after trading began or, in the case of WeWork parent We, were aborted before trading even started.

    Uber (NYSE:UBER), Lyft (NASDAQ:LYFT), WeWork and Peloton Interactive (NASDAQ:PTON) each showed rapid revenue growth. Profits, however, don't exist and likely won't for some time to come. And now, investors are refusing to pay up for losses.

    The question for forward looking investors is simple. Despite the end-of-week rally, will these IPO problems, along with the additional factors listed above, prove to be psychological downers for stocks? We can't know, of course, but it pays to be aware of the technical factors as well as the fundamentals.

    5 Key Takeaways From The U.S. Equity Market's Third Quarter
    5 Key Takeaways From The U.S. Equity Market's Third Quarter

    Add a Comment

    Comment Guidelines

    We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

    • Enrich the conversation
    • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
    • Be respectful. Even negative opinions can be framed positively and diplomatically.
    •  Use standard writing style. Include punctuation and upper and lower cases.
    • NOTE: Spam and/or promotional messages and links within a comment will be removed
    • Avoid profanity, slander or personal attacks directed at an author or another user.
    • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
    • Only English comments will be allowed.

    Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

    Write your thoughts here
    Are you sure you want to delete this chart?
    Post also to:
    Replace the attached chart with a new chart ?
    Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
    Please wait a minute before you try to comment again.
    Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
    Brad Smith
    Brad Smith Oct 07, 2019 8:58PM ET
    Saved. See Saved Items.
    This comment has already been saved in your Saved Items
    Charley, thank you for this article. There have already been quite a bit of talk that this trade war will last decades going forward. There is definitely no end in sight. I frequently like to use the transportation sector as an economic bellwether and the data coming from that sector has been very tepid so far.
    Are you sure you want to delete this chart?
    Replace the attached chart with a new chart ?
    Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
    Please wait a minute before you try to comment again.
    Add Chart to Comment
    Confirm Block

    Are you sure you want to block %USER_NAME%?

    By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

    %USER_NAME% was successfully added to your Block List

    Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

    Report this comment

    I feel that this comment is:

    Comment flagged

    Thank You!

    Your report has been sent to our moderators for review
    Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

    Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
    Continue with Google
    Sign up with Email