I watched "The Terminator" (1984) last weekend on Netflix with my family. As a new installment in the franchise gets ready to hit theaters, I decided to initiate the kids to the original.
I've seen this sci-fi classic countless times. But this time around, a thought occurred to me: The decade-long bull market is like the Terminator. The long-term rise in stocks has proven impervious to all manner of blows that should have been fatal.
Recession signals, Brexit setbacks, excessive valuations, weak earnings, slowing growth, political scandals, military crises, ruinous tariffs…all of these bullets and bombs just bounce off the market.
Let's look at what's driving stocks. I'll also provide specific "defensive growth" trading moves that allow you to profit from the rally but with downside protection.
Un-stop-a-bull…
The three main U.S. stock indices closed last Friday in positive territory for the week (see table).
U.S. stock index futures edged higher Monday morning in pre-market trading, as investors got ready for another busy week of earnings.
We're experiencing a great year in the stock market. It just doesn't feel that way. Volatility and fear have increased and the bears are more vocal. However, despite projections of negative earnings growth for the third quarter, the corporate report cards are coming in better-than-feared.
Nearly 40% of S&P 500 companies have reported Q3 earnings so far, according to research firm FactSet. Among these companies, 78% have exceeded analyst expectations. But a few bellwethers have stumbled.
E-commerce giant Amazon (NSDQ: AMZN) last week reported third-quarter earnings that missed consensus expectations, weighing on its stock and the tech sector.
Amazon's disappointing earnings largely resulted from a massive investment to expand its free one-day delivery program. Amazon also spooked investors by issuing fourth-quarter revenue guidance in the range of $80 billion and $86.5 billion, far below Wall Street's average estimate of $87.4 billion. That's a worrisome sign that the crucial holiday shopping season might be a bust not just for Amazon but for retailers in general.
Industrial conglomerate 3M (NYSE: MMM) beat profit expectations but missed on revenue and reduced its earnings outlook. The company largely blamed the trade war.
Offsetting the bad news on earnings was plenty of encouraging results, notably from Intel (NSDQ INTC), Visa (NYSE: V), Microsoft (NSDQ: MSFT), Tesla (NSDQ: TSLA), and Verizon (NYSE: VZ), all of which beat estimates.
Verizon's growth trajectory underscores the long-term investment opportunities in wireless development. For the best plays on the advent of 5G ("fifth generation") technology, click here for our special report.
Corporate earnings will continue to occupy center stage in the week ahead. Meanwhile, several economic indicators point to trouble.
The International Monetary Fund's October World Economic Outlook shows world gross domestic product (GDP) growth slowing from 3.6% in 2018 to 3.0% in 2019 and 3.4% in 2020, lowered from July's interim projections. If 3.0% turns out to be the final number, it would be the slowest global growth since the Great Recession of 2008-2009.
Against this dreary backdrop, it should come as no surprise that business leaders are getting pessimistic.
Read This Story: The Aging Bull: Still Kicking, But For How Long?
Using their windfall from the 2017 tax cut, companies repurchased more than $1 trillion in stock over the past two years. The "sugar high" is coming to an end. The longevity of the bull stock market is now very much in doubt, especially if corporate managers grow unwilling to prop up stocks with buybacks.
Ominous portents…
In the wake of Donald Trump's surprise victory in 2016, business leaders were euphoric. The prospect of tax cuts and deregulation from the pro-business Trump White House fed the "animal spirits" of corporate America.
Those spirits have waned.
In the third quarter, confidence among corporate chief executive officers (CEOs) fell to its lowest level in 10 years, according to a survey released this month by the research group Conference Board. The last time the survey showed a comparable level of pessimism was during the Great Recession, when companies were laying off hundreds of thousands of workers.
The bleak mood of the business community is likely to become a self-fulfilling prophecy. Falling confidence prompts management to retrench and cut back on investments, which in turn weighs on economic growth and stocks.
The Conference Board survey states:
"CEO Confidence declined to its lowest level in a decade. Tariffs and trade issues, coupled with expectations of moderating global growth, are causing a heightened degree of uncertainty. As a result, more CEOs than last year say they have curtailed investment. In a separate poll of CEOs and CFOs (conducted in September), we found that a large majority believe the recent trade disputes will have a lasting impact on their business."
About 21% of CEOs reported increasing capital spending plans since January 2019, while the same proportion scaled back spending. The biggest cuts were among manufacturing firms, which are reeling from the trade war. In 2018, when the survey asked this question, 35% of respondents had increased their capital spending plans and 10% had slashed them.
The folks who control the purse strings, corporate chief financial officers (CFOs), are getting pessimistic as well. A quarterly survey by Duke University found that more than half (53%) of U.S. CFOs believe that the U.S. will be in an economic recession by the third quarter of 2020, and 67% predict a recession by the end of 2020.
Exacerbating these fears is the pronounced decline of U.S. manufacturing in the third quarter of 2019 (see chart).
Another red flag is the bond market. It's trying to tell us something. Indeed, the bond market is a more accurate barometer of economic expectations than the stock market.
Long-term interest rates tend to be high when investors anticipate a thriving economy. That's because during a boom, the Federal Reserve can be expected to tighten the monetary spigot to guard against inflation. Conversely, rates tend to be low when investors expect a sputtering economy and loose monetary policy. But 10-year bond rates have plummeted, from more than 3% last year to 1.83% as of this writing.
Where should an investor turn? I'm especially bullish on the utility sector, which currently provides an unbeatable combination of growth, income and safety. But many utility stocks have gotten too expensive. To find utility stocks that still trade at appealing valuations, click here for our "dividend map."
You should also look for long-term trends with sufficient momentum to defy current headwinds. One such trend is the marijuana industry boom.
Legal cannabis is a game-changer for investors. But here's the snag: the industry is getting crowded and weak companies abound. You need to find the right marijuana stocks. The good news is, many marijuana stocks have temporarily pulled back in price and they're now appealing bargains. To get our research report on the best marijuana plays, click here now.
Of course, in the aforementioned movie, the cyborg is destroyed in the last reel. When will stocks face a similar fate? Trying to time a correction is a fast way to lose money. Instead, stay selective and pick your spots.
John Persinos is the managing editor of Investing Daily. He also serves as editor-in-chief of Marijuana Investing Daily. Questions or comments? You can reach him at: mailbag@investingdaily.com
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