Stock market sell-off could signal turning point for bull market, as Dow plunges again

In a span of six treacherous days on Wall Street, the mood of the stock market has turned from giddy optimism to gloomy pessimism.

Pinpointing major shifts in markets is an inexact science. But some Wall Street pros say the current one has reached a turning point, as the low interest rates that powered stocks higher over the last decade give way to higher borrowing costs and heightened risks.

A swift 1,776 point, or 6.6 percent, dive in the Dow Jones industrial average just a week after it hit a record high shows just how edgy and uncertain the investing environment has become. 

Investors, who a week ago were talking up the market's prospects thanks to a strengthening economy, are now noticing a worrisome shift in its behavior.

"Has the market hit an inflection point? I think it has," says Jim Paulsen, chief investment strategist at The Leuthold Group, a Minneapolis-based money-management firm.

This market downturn, he predicts, will likely be more severe than the 10.2 percent drop the market suffered in February. But he's still not sold on the idea that the break will lead to a bear market, or 20 percent drop, from the market's recent high.

The debate about whether the market vibe has flipped from bullish to bearish centers around a few key issues: They include risks to the economy caused by a rise in interest rates; trade frictions with China; the recent drubbing of technology stocks; and increasingly high investor expectations that could lead to easy disappointment.

Some Wall Street pros, including Amanda Agati, co-chief investment strategist at PNC Financial Services Group, say the recent carnage on Wall Street was long overdue and is a "short-term blip" that will settle down quickly. She stresses that the U.S. economy remains strong and the threat of recession is low. The mood of investors will brighten, she predicts, when companies start reporting their third-quarter results.

"I think earnings will be really strong and provide an underlying support for the market and be a positive catalyst," she says. The current downdraft has a different feel than the sell-off in February, she adds. That drop was caused by too many investors making a big bet on the stock market remaining calm, which backfired when volatility roared back, catching them on the wrong side of the trade.

Still, others worry that the market is entering a more difficult phase, one that will have a much different, more challenging feel to it.

So what changed in the past week that has investors so worried?

The biggest change has been an acknowledgement that rising interest rates could cool a strong U.S. economy and also put a dent in corporate earnings. The combination of the Federal Reserve hiking short-term rates last month and another increase expected in December, coupled with a spike in the 10-year U.S. government bond to a seven-year high has made stocks less attractive compared with lower-risk bonds. 

Low rates and cheap money resulted in a flood of money into stocks in recent years, as people searched for bigger returns.

"The wave of money that was moving into the market is now reversing," says Savita Subramanian, head of U.S. equity strategy at Bank of America Merrill Lynch. "As liquidity is withdrawn from the market, it amplifies market volatility" and price swings.

Higher borrowing costs also make it tougher for Americans to afford houses and buy cars on credit, analysts say.

The protectionist trade policies of President Donald Trump and his administration's tariff fight with China have upended the long era of free trade. That has unintended consequences, ranging from a disruption in global supply chains for technology to higher costs for businesses that either have to eat the costs or pass them along to shoppers through higher prices. 

"The trade war is no longer abstract economics, we're now starting to see it is real-world stuff showing up in the earnings results of companies," says Hugh Johnson, chairman and chief investment officer at Hugh Johnson Advisors in Albany, New York.

He notes that companies ranging from luxury retailer Tiffany to auto parts maker Delphi Technologies have warned that their profits will take a hit due to cost pressures related to tariffs.

After years of leading the market higher, fast-growing and innovative tech companies like Netflix and Apple have come under intense pressure in the recent sell-off, signaling that investors are becoming more risk averse and taking a more defensive stance.

"The sell-off has attacked the leadership of the market, and that's a significant change," says Paulsen. "These are the names that most people own and feel really good about. You are kind of punching investors in the gut where it hurts."

The tech stock drubbing, which also has been driven by increasing fears of regulatory scrutiny from government amid privacy breaches, shows "investors are getting a bit more defensive," Agati says. 

Consumer confidence is at an 18-year high. And small-business optimism is at its highest level since 1983. And why not? The economy's 4.2 percent growth in the second quarter was the fastest in four years, and the nation's jobless rate is near a 50-year low of 3.7 percent.

The good times might lift investor expectations too high, which raises the risk that incoming good news on earnings or the economy won't be good enough. "That is a higher-risk, lower-reward market," says Paulsen.

Indeed, all that confidence can lead to complacency and dangerous risk-taking that can lead to bad outcomes, he adds.

"Confidence reflects greed," Paulsen says. "It reflects complacency. It leads to behavior that lends itself to people getting out over their skis, whether borrowing too much money or getting too exposed to risky parts of the market or piling into the popular stocks that are working." 

Despite all the bad news piling up on the market, it "doesn't mean investors should see equities wholesale," says Subramanian of Bank of America.

 

October 12, 2018

Sources: USA Today

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  • Shares in education publisher Pearson soar as it says it's on track to return to growth

    Shares in education publisher Pearson soar as it says it's on track to return to growth

    s it announced it is on track to return to profit growth this year, sending its shares soaring.</p><p>The education publisher said sales at its North American division, which is its largest, were flat during the first nine months of the year due to an ongoing decline in its US textbooks offsetting growth elsewhere.</p><p>However, it said there will be underling profit growth, as it remains confident that its shift from more traditional classroom materials to digital is beginning to pay off.</p><p>US struggles: Sales at Pearson's US higher education course books were down 3 per cent</p><p>Pearson, which has been selling assets such as the Financial Times and Economist, said its online course management package saw up a 13 per cent jump in sales, while attendance at English language test centres is up 34 per cent. </p><p>But sales at its US higher education course books were down 3 per cent.</p><p>It still expects adjusted operating profits to come in between £520million and £560million and it is on track to achieve cost savings of £300million, it said today. It is also set to get a boost from one-off tax benefits.</p><p>Chief executive John Fallon said: 'We are on track to return to underlying profit growth and, with a strong balance sheet, are set up well for the future.</p><p>'We are picking up the pace in our growth opportunities, performing well competitively and making good progress in our digital transformation.</p><p>'There's a lot still to do but we are increasingly excited about the opportunity to help learners acquire the knowledge and skills to succeed in a fast changing world.'</p><p>Analysts said the trading update showed some improvement, but overall remained cautious about the future of the company, which has struggled for a few years now.</p><p>Russ Mould, investment director at AJ Bell, said: 'Pearson has faced challenges with its higher education business as many students shun textbooks in favour of free online and second-hand resources. It has tried to simplify its business and put some operations up for sale.</p><p>'This hard work looks to be paying off, albeit slowly. However, you must appreciate that Pearson's earnings can be heavily weighted to the fourth quarter in terms of revenue and profit. Today's nine month trading statement certainly gives reason to be optimistic but it is too early to get carried away.'</p><p>Helal Miah, investment research analyst at The Share Centre, said: 'The tone of the management's comments was better and one of optimism for the future as the turnaround plan begins to stabilise the business. A focus on providing more of its products online is essential and here it seems they are making some progress.</p><p>'For us though, we need more evidence that the management's implemented plans are working in a highly competitive online environment. We have had so many profit warnings over the years that we are not fully convinced that a turnaround is coming. We can at best recommend a 'hold' for the shares for investors seeking a balanced return and willing to accept a medium level of risk.'</p><p>Nicholas Hyett, equity analyst at Hargreaves Lansdown: 'There's still a lot to do before Pearson can be said to have completed its digital transformation, and a strategic shift like that comes with risks – given the falls in share price since 2015 Pearson shareholders know that only too well. But after today's numbers, a pass mark is looking increasingly achievable.' </p><p>Do you want to automatically post your MailOnline comments to your Facebook Timeline?</p><p>Your comment will be posted to MailOnline as usual.</p><p>Do you want to automatically post your MailOnline comments to your Facebook Timeline?</p><p> We will automatically post your comment and a link to the news story to your Facebook timeline at the same time it is posted on MailOnline. To do this we will link your MailOnline account with your Facebook account. We’ll ask you to confirm this for your first post to Facebook.</p><p>Part of the Daily Mail, The Mail on Sunday &amp; Metro Media Group</p>

    1 October 17, 2018
  • National Pasta Day: Where to get free pasta and deals Wednesday

    National Pasta Day: Where to get free pasta and deals Wednesday

    ><p>Oct. 17 is National Pasta Day and several businesses are celebrating with deals and freebies for the beloved, versatile food.</p><p>According to the made-up holiday's website www.nationalpastaday.com, there are more than 600 known pasta shapes. </p><p>Ranker.com, a crowdsourced rankings website, found the 10 most popular types to be: fettuccine, penne, ravioli, spaghetti, tortellini, angel hair, farfalle, linguine, rigatoni and rotini.</p><p>October also is National Pasta Month and if one Italian dish isn't enough it's National Pizza Month too.</p><p>Plus, Olive Garden's Never Ending Pasta Bowl promotion lasts through Nov. 18.</p><p>Here are the best deals and ongoing specials, available at participating locations. To be on the safe side, check with your closest location before heading out.</p>

    1 October 17, 2018

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