Buy Fear, Sell Greed

There’s an old Wall Street adage that says equity markets take an escalator higher but an elevator lower.

October 15, 2018    |    By Mike Schwager

Performance for Week Ending 10/12/2018:

The Dow Jones Industrial Average (Dow) fell 4.19%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 4.21%, the Standard & Poor’s 500 Index (S&P 500) closed down 4.10% and the Nasdaq Composite Index (NASDAQ) shed 3.74%. Sector breadth was negative with all 11 of the S&P sector groups finishing the week lower. The Materials sector (-6.59%) led the retreat followed by Industrials (-6.41%) and Financials (-5.57%).

Index* Closing Price 10/12/2018 Percentage Change for Week Ending 10/12/2018 Year-to-Date Percentage Change Through 10/12/2018
Dow 25339.99 -4.19% +2.51%
Wilshire 5000 2856.93 -4.21% +2.86%
S&P 500 2767.13 -4.10% +3.50%
NASDAQ 7496.13 -3.74% +8.60%

*See below for Index Definitions

MARKET OBSERVATIONS: 10/8/2018 – 10/12/2018

There’s an old Wall Street adage that says equity markets take an escalator higher but an elevator lower. That certainly provides a good description of the market’s recent activity. After steadily rising since the bottom reached in early April, this week saw the S&P plunge by over 5% in a two-day period that nearly wiped out most of the year-to-date gains.

Weighing on the market were concerns over the recent rise in bond yields, worries over slowing global growth after the International Monetary Fund (IMF) cut its growth forecast for the first time in more than two years, the unresolved trade issues with China, and fears the Federal Reserve may have to raise rates at a quicker than anticipated pace to head off budding inflationary pressures.

Investors have also become a tad bit nervous ahead of the upcoming third quarter reporting season. Over the past week a handful of companies have issued profit warnings citing trade concerns, higher input costs, the stronger US dollar, and softness in China. While the sample size is still too small to draw any firm conclusions on overall Q3 earnings, the warnings have been enough to spook investors. On a positive note, the bar heading into reporting season has been lowered, which in turn may leave some room for upside surprise. According to Bloomberg, Q3 earnings on the S&P are expected to grow by just under 20%.

Fear & Greed: According to market sage Warren Buffett, it is wise to be “fearful when others are greedy and greedy when others are fearful.” Fear was very evident this past week with some of the traditional “fear fulcrums” signaling extreme levels of PANIC (these indicators also tend to be contrarian in nature): For example, on Wednesday when the Dow fell by over 800 points, down volume at one point accounted for over 88% of total volume and the CBOE Volatility Index (aka the Fear Index) jumped by more than 40%. In addition, market breadth on the NYSE was over 7 to 1 in favor of decliners, signaling broad based selling. While none of these indicators will prevent the market from going lower, signs of capitulation have often been a precursor at or near market bottoms.

Even with the recent drawdown in the market and the surge in market volatility, the current outlook continues to lean mildly bullish, although we appear to be approaching a pivotal junction. On one hand, forward earnings projections remain strong, economic data suggests no near-term threat of a recession and trade tensions have eased a bit following the trade agreement between the US, Canada and Mexico. However, on the other hand, bond yields have been moving higher reflecting the strong growth outlook, supply concerns have pushed oil prices to levels last seen almost 4-years ago, trade talks with China seem to have stalled and the mid-term elections loom.

While the checklist of things to worry about has been growing, the late-stages of an economic cycle has historically been a fruitful phase for market returns. Timing a market top is near impossible, however with the economy and earnings still showing signs of robust growth, equity prices should continue to have an upward bias. At some point, rising bond yields will become a headwind for the equity markets and be used as a chance to opportunistically de-risk out of stocks and into fixed income. In the meantime, higher yields coupled with strength in the US dollar seem indicative of a stronger growth environment.

Fundamentals Intact: The S&P 500 has now delivered two consecutive quarters of 20%-plus earnings growth, and early indications suggest the third quarter earnings season is off to a strong start. The US economy also remains healthy. Following 4.2% growth during the second quarter, the Atlanta Fed’s GDP Now model shows Q3 growth tracking at a 4.2% pace. The markets valuation has contacted since the start of the year, leaving the S&P 500’s valuation multiple at 15.3-times the 2019 consensus earnings forecast. While valuation should never be viewed as a catalyst, at a minimum, current valuation levels should help cushion downside risk.

The Week Ahead: Third quarter earnings season moves to the front burner this week with 54 members of the S&P 500 scheduled to release results, including seven members of the Dow Jones Industrial Average. It will be a busy week on the data front. Reports of interest include; September retail sales, the October Empire State manufacturing survey, September industrial production, the August JOLTS report, September housing starts and building permits, the October Philadelphia Federal Reserve’s manufacturing business outlook survey, and September existing home sales. Also of interest will be Wednesday’s release of the minutes from last month’s Federal Open Market Committee (FOMC) meeting. The Fed speaking calendar will also be in the spotlight with 5 members of the Federal Reserve scheduled to make appearances.


The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.

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