Q3 is a period most investors are eager to put in the rearview mirror. Performance around the world was horrible – the SPX sank ~6.9% in the Sept-end Q, Europe’s main indices slumped ~9%, and China’s mainland markets plunged (the SHCOMP fell ~29% in Q3). Softening EM growth (esp. in China) and persistent commodity price softness helped plant the seeds for equity weakness but one of the biggest downside drivers was a loss of faith in global policymakers (the surprise CNY devaluation on 8/11, Beijing’s bungled response to the mainland stock sell-off, Yellen’s unsettling 9/17 press conf, etc). Meanwhile, firms like Glencore and Petrobras are viewed by many to be possible conduits for turning a contained and confined EM/commodity crisis into a “systemic” event. Events such as Hillary’s drug price tweet and the VW emissions scandal just acted as incremental fuel for an already burning fire.
What can help stocks stabilize? The bloodline of Q3’s turmoil can be traced back to the CNY devaluation on 8/12, an event that greatly exacerbated the existing EM/commodity worries and inflamed concerns of spillover into DMs (inc. the US). Therefore, if risk sentiment is going to heel, economic trends out of China will have to begin stabilizing (something that could very well occur, possibly as soon as the week of 10/12). Meanwhile, Fed liftoff remains a prerequisite for higher stock prices (this is unlikely to occur before the 12/15-16 meeting). A flat SPX year remains possible although that would require a ~130 point rally from present levels (or ~6.7%).
The news vacuum will persist for another 1.5 weeks. Investors have suffered through a death of news and that will last several more days. However, the week of 10/12 brings a deluge of CQ3 earnings and a bunch of China economic data (imports/exports 10/13, CPI/PPI 10/14, retail sales/IP/GDP 10/19, etc).
Resource Files
4th Quarter GTM
