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The month of October always had a frightful reputation.
The market declines of 1929 and the 1987 crash both happened in October even if they ultimately had very different outcomes, one leading to the Great Depression and the second one being just a painful hitch in a major secular bull market.
October 2018 was no different.  What a month !

In our various posts after the Sep 20th peak, we had warned investors about the upcoming sharp correction.

It unfolded as we expected but was sharper and scarier than we thought.

the MSCI World Index lost – 7.5%, the MSCI Emerging Markets index lost -8.5 % while the MSCI Asia Pacific fell by  almost 10 %.

In the US, the S&P 500 had its worst month since 2010, losing 7 % of its value, the Nasdaq Index 100 fell  9%, while the Russell 2000 lost 11 % of its value.

As we had warned since March / April of this year, major market leaders and technology stocks like Netflix and Amazon suffered large declines despite reporting excellent results and the last casualty was Apple Inc. that fell sharply just because the company stopped publishing the breakdown of its sales by products.

In Europe, markets were down – 6 % on average while Japan and China both lost 9 % on average.

As would be expected, Volatility soared and the VIX index shot up 75 % from 12 to 21, but did not reach the extremes of 2016 and 2015.


The correction really started in the US.

Asian, Emerging and European equity markets had been in corrections or outright bear markets since January 2018.

What was odd about October sell-off is that it  took place in the midst of a good US third-quarter earnings reporting season.

Third-quarter earnings have been stunning. According to FactSet, of nearly half of the S&P 500 companies that have reported third-quarter results, they corporate earnings have averaged 22.5% annual growth.

Earnings were unequal and forward guidance was rather prudent.
But the most striking feature has been the severe punishing of companies that disappointed.

Boeing and Twitter reacted extremely well after posting better-than-expected sales and earnings while providing positive guidance, while Amazon reported a huge third-quarter earnings surprise ($5.75 per share vs. a consensus estimate of $3.09. + 86 % ) but fell sharply nevertheless.  It only recovered in the past few days.

Goodbye Trillion Dollar Companies

The same happened to Apple Inc. which reported Earnings 5 % better than estimates but was punished by investors and lost its US$ 1 Trillion company status only a month after having gained it.



As we warned repeatedly since March 2018, it is now GAME OVER! for the high flying technology companies that led the entire 2009 -2018 market.

The ONE TRILLION DOLLAR COMPANY milestone will probably take years to be regained now.

Another interesting feature is that the October correction took place in an environment where companies are flush with cash and are buying back their shares at a record pace.

And the latest to join the share Buy-Back party is Warren buffet who for the first time in 50 years announced that he would allocate 1 % of his massive US$ 100 Billion in cash to buy back shares in Berkshire Hathaway.

That follows Apple Inc‘s decision in May to embark on a 100 Billion US Dollar share Buy-back program something that helped propel the company to the 1 Trillion market capitalization mark.

For the first time in 10 years, buybacks are garnering the largest share of cash spending by S&P 500 firms, according to Goldman Sachs.

Buybacks rose by nearly 50% (to $384 billion) in the first half of 2018 and $754 billion in new stock buybacks have already been authorized this year. That’s up 80% from the same period in 2017.

2018 Stock repurchases could reach a record $1 trillion by November.

In fact, Share Buy-back are so big that they are actually shrinking the size of the stock market by reducing drastically the number of shares traded.

The number of S&P 500 shares has shrunk by 7.7% since the start of 2011 and it’s even higher for Dow stocks.

90% of all companies listed on the Dow are buying back stock and an average of 14.7% of the outstanding shares in the Dow Industrials have disappeared in buy-backs in the last decade.

Fewer outstanding shares means that the same amount of investors and money is chasing fewer stocks and therefore send their prices sky-rocketing.

This is what has been happening in the US stocks market in recent years and explains the lofty valuations reached.

Fewer outstanding shares also mean higher earnings and dividends per share, but not necessarily better operating margins.

But the truth of the matter is that US corporations are buying back their own shares at record high prices AND extreme valuations.

In doing so, they have lifted equity prices and valuations, so it is interesting to note that the October correction happened while this buy back phenomenon was in full swing.

Investors may be starting to disagree with management on how high equity valuations and stock prices should really go !

October’s sell-off was initially triggered by rising bond yields, however the back up in bond yields was not dramatic either.

Yes indeed, European economies are slowing down and China is on its path of structural economic deceleration, however the correction started in the US and was initially triggered by a back-up in US bond yields.

The U.S. achieved 4.2% annual GDP growth in the second quarter of 2018, after 4.1 % in the first quarter as Donald Trump’s tax cuts amounted to a shot-in the-arm in an already booming economy inherited from the OBAMA administration.

For the 3rd Quarter, the rate of growth slowed down to 3.5 % and  Q 4 should be strong as well. However, it is likely that the US economy will slow down significantly  in 2019 as the base effect of the Tax cuts fade away.

The US economy is roaring thanks to the US consumer.

Consumer confidence is soaring. It hit an 18-year high in September -just shy of the all-time record.

Retail sales are robust at both the high end AND the low end of the spectrum. Wal-Mart just had its best earnings in 10 years.

Target’s CEO says the current consumer environment is the strongest he’s seen in his career. The company is seeing unprecedented growth in foot traffic and same-store sales.

It’s no surprise consumers are confident and spending … personal income is up for the third year in a row. Median income is up to $61,400 in 2017, according to the Census Bureau.

Wages are starting to move, with companies like Amazon and Target raising their minimum wage to $15. They were 7$ only 5 years ago.

For the first time ever, the average 401(k) account balance at Fidelity hit six figures, at $104,300.

Unemployment is now at a 48 year low of  3.7%. And it could drop to just 3% over the next year. Job growth surged to its highest level in 7 months in September.

No surprise then that corporate earnings have been growing so fast and topped 20 % for several quarters.

As we predicted, inflation rose and surpassed the FED’s 2 % target, but monetary policy is still marginally accommodative with rates at 2.25 %

Last month, the Federal Reserve voted unanimously to increase key interest rates and removed the word “accommodative” from its Federal Open Market Committee statement.

Fed Chairman Jerome Powell was also the picture of calm and transparency, reassuring Wall Street that the U.S. economy would grow without excessive inflation. Many economists are now forecasting a fourth interest rate hike in December and so do we.

The Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index is forecast to remain at 2.1% for the next several months. So, the Fed is not expecting inflation to accelerate, especially is Oil prices start falling as we expect.

Treasury bond yields have inched higher in recent weeks, as the bid-to-cover ratios on Treasury auctions declined to 2.4, down from 2.8 a month ago. To be fair, with a record 1.3 Trillion of new debt issuance, the Fed has a lot of convincing to do to finance America’s booming deficits.

On a more global view, monetary policies are still EXTREMELY accommodative in Japan and Europe and China is now opening the flood gates of monetary and budgetary policies to cushion its structural slowdown.

Money is still plentiful and there is no systemic risk on the horizon for the immediate future.

Corporate debt will become a real issue sometimes in the second half of 2019

The current  “Goldilocks” environment is truly what made us see the October correction as a correction and the beginning of the bear market rather than the bear market itself.

The monetary environment will probably support equities for another quarter or two before we move into an environment of lower growth, higher inflation, higher interest rates and lower corporate profit growth ( we expect 4 % only in 2019 )

The true catalyst for the sharp October sell-off, as we highlighted in our various articles, has been the uncertainty created by Donald Trump’s trade war with China and the October sell-off will cost him dearly in Next Tuesday’s elections.

Donald Trump Trade War with China was politically motivated.  American businesses always warned Donald Trump again confronting China, their largest client and their largest sub-contractors.

Tim Cook met several times with Donald Trump this year to warn him about the negative implications the Trade War would have on investor’s confidence and its likely impact on investments.

Indeed, the main effect of the Trade War with China has been to make CEO’s postpone investment decisions and wait for a more serene climate, impacting negatively US investments.

China took the same posture and decided to ride it out. Their refrained for a tit-for-tat policy, positioned themselves as the world defenders of free trade and reduced import taxes.

The October correction in US equities is rightly associated with Donald Trump’s Trade War on China and it will cost him dearly next Tuesday.

American voters don’t like to see their 401-Ks fall by 10% in a month.

We expect the Republican Party to lose the majority at the House of Representatives, the Senate and a large number of Governors in Tuesday’s mid-term elections.

And as we also predicted, last week’s bottom in equity markets came when Donald Trump suddenly changed his tone and announced a “major” deal with China in November. 

His political advisors made him realize that going into a mid-term election in the midst of an equity crash was the worst thing that could happen to him.

And as we also predicted, the Yuan saw a major reversal last week.

Xi Jing Ping is inaugurating the Import Expo in Shanghai and the next official line will be that imports and a strong Yuan are good for a Chinese consumer society.

A US-China trade deal will probably be hammered out in November at Buenos Aires G-20 meeting, and it will probably rely on a clear commitment of China to reduce its trade surplus with the US

October’s correction is over but the damage has been significant,

The entire 2009 – 2018 Bull market has peaked on September 20th 2018 in the USA and on January 26th 2018 in global equities !

We see a strong rally unfolding in the next two months and it will spill over into Q1 2019.

But US equities will fail to make new highs. save for the Dow Jones maybe.

Asia, Emerging Markets, and Europe will outperform US equities

China is embarking on a new SECULAR Bull Market that will last for many years and will see the Chinese currency rise significantly


The Week in Review   4 Nov 2018



A strong rebound in global equity markets after Donald Trump’s announcement that he wished to have a trade deal with China.

Equity markets rose by 3 to 5 % in the last two days of the week and Asia shot-up 5 %. Hong Kong listed shares rose by almost 7 % and Japan by 5 %



The US dollar was stable last week but we expect it to fall next week as the US mid-term elections turn into a massive anti-trump vote.

We have seen major reversal in AUD, NZD and British Pounds already.

The Chinese YUAN made a significant technical reversal and is a screaming BUY.

BUY the EURO and SELL the Japanese Yen.




Oil is collapsing as we expected.

Crude fell -6.6 % last week as major technical support were broken and Donald Trump Announced that China would Buy US oil rather than Buy Iranian Oil.

The oil market’s two-year bull run is running into one of its biggest tests in months, facing a tidal wave of supply and growing worries about economic weakness sapping demand worldwide.

After topping out at more than $75 and $85 a barrel just a month ago, both U.S. crude and Brent benchmark futures have grappled with near-relentless selling.

For a time, prices had some support on hopes that renewed U.S. sanctions on Iran would force barrels off the market.

That changed in the last week. The world’s three largest producers – Russia, Saudi Arabia and the United States – all indicated they were pumping at record or near-record levels, while the United States said it would allow waivers that could allow buyers to keep importing Iranian oil, lessening the threat of a supply crunch.

Those factors have shifted the market’s perception back toward worries about oversupply, and pushed U.S. futures to lows not seen since April.

The structure of the U.S. crude futures curve had for several months indicated expectations for tighter supply, but future-dated contracts now suggest investors think markets could be awash in oil over the coming months.

The magnitude of recent selling is strongly suggesting that global oil demand is weaker than expected, as we have been arguing all along.

There has been an exodus among speculators as well.

In the last two weeks, net bullish bets on oil have declined to the lowest level in over a year. Selling notably accelerated on Thursday after U.S. West Texas Intermediate crude futures fell below $65 a barrel, a level that had stood firm in previous selloffs during the summer and fall.

The oil market ran higher in anticipation of this week’s formal re-imposition of sanctions against Iran by the United States, and on concerns that supply from producers like Saudi Arabia would not be able to make up the difference.

A loss of 1 million bpd from Iran, further declines in Venezuela, coupled together with geopolitical disruption in Libya and Nigeria could easily be compensated.

Output from the Organization of the Petroleum Exporting Countries, led by Saudi Arabia, rose to levels not seen in two years.

U.S. production hit a record 11.3 million barrels a day in August, and Russia’s output rose to 11.4 million bpd, a post-Soviet era peak.

Lumber ended its bear phase, get ready for a rally in Copper, Platinum and Gold



Kevin Noble