Dow Down 5 Straight Weeks: Longest Losing Streak Since 2011

Dow Down - Slight Friday Recovery But Issues Remain

In the longest losing streak in 8 years, we saw the Dow Down 5 straight weeks. The stock market had a relief rally on Friday as the S&P 500 increased 0.14%. 

However, it lost a lot of the gains it opened the trading session with. Nasdaq was up 11 basis points and Russell 2000 outperformed as it was up 0.85%. IX fell 6.32% to 15.85. 

Dow was up 0.37%, but even with this rally its losing streak hit 5 weeks which is the longest streak since 2011. 

As you can see from the table below, when the Dow is in a 5 week losing streak and is above its 50 day moving average, it declines 75% of the time in the following six months with an average loss of 1%. Nasdaq and S&P 500 have been down 3 straight weeks which is their worst streak since December 2018.

S&P 500 is still near the low end of its recent range as it is less than 1% from its correction low. I think the market will break that low and have its first 5% decline of the year. A 5% decline is very common. With the way the economic reports have come out, it wouldn’t be surprising if the market falls 10% by the time this correction is over. Returns in the next 3 months greatly depend on how the trade negotiations go.

Sector Breakdown: Utilities Fall Finally

Dow Down - Only 2 sectors fell on Friday: the utilities and consumer staples. This was a proper ‘risk on’ day even though the market didn’t rally that much. Those sectors fell 0.21% and 0.4%. Utilities are still trouncing the S&P 500 this month. They are up 1.91% and the S&P 500 is down 4.07%. That’s a sensible reaction to the latest economic data as the CNBC median of estimates shows GDP growth will be 1.8% in Q2.

Atlanta Fed’s estimate is at 1.3%. 

As you can see from the chart below, the estimate is towards the low end of its range in the past 8 years. Goldman Sachs is also at 1.3% and JP Morgan is at 1%. I have been saying how growth will likely be below 2%. Now it’s possible it will be below 1%. The only positive data I’m seeing is from housing.

Best sectors on Friday were the financials and materials which increased 0.77% and 0.5%. WTI oil increased 1.92% to $59.02 and the dollar index fell 0.25% to $97.61. Those are reversals of the recent trends. Even though the financials rallied, the 10 year yield was flat at 2.32%.

It is still very low as it is 9 basis points below the Fed funds rate. 2 year yield increased 2 basis points to 2.16% which means the yield curve flattened. Difference between the 2 yields is now only 16 basis points. If the Fed keeps its guidance for no cuts in 2019 at its June 19th meeting, this part of the curve will invert. Specifically, the latest odds for at least one rate cut by the end of the year are now 77.3%.

Quick Update On Q1 Earnings

Dow Down - I’ve been closely following whether FactSet’s final results end up showing negative Q1 earnings growth. It is now almost 100% clear that growth will be negative as EPS is down 0.4% year over year with 97% of firms reporting earnings. 76% of firms reported positive EPS surprises and 59% reported positive revenue surprises. 

It was a great quarter. The problem is estimates have been falling quickly in May which means Q2 will probably see negative growth again.

Therefore, this is technically an earnings recession, but it will be a relatively weak one unless either Q2 earnings really disappoint or Q3 estimates crater in the next few months. Q2 earnings are expected to fall 2.1%. Q1 earning started the quarter expecting a 4% decline. 

Therefore, estimates have slightly over one month to fall about 1.5% for Q2 growth to be negative again. Sequential weakness in Q2 is much worse when you use The Earnings Scout’s data. But even so, that estimate is still positive.

The chart below shows an estimate for S&P 500 earnings growth using the Markit PMI reading. It’s no surprise this indicator expects a big dip in earnings because the Markit report was terrible. 

So far, EPS estimates have diverged as earnings will probably have a very minor dip in Q2 and Q3. That being said, if the Markit PMI stays weak and is supported by hard economic data, we will see 2nd half earnings estimates decline sharply.

Debt Ceiling Update

Dow Down - The chart below shows the history of the debt ceiling being raised since 2010. Debt ceiling will always be raised. Compromise forged to raise the ceiling makes this drama worth following. 

According to Treasury Secretary Mnuchin, the government will default on the debt late in the summer if nothing is done. The estimated deadline is September 30th. The U.S. government won’t default on its debt, but it does make for some interesting political theater.

The goal of the next budget deal will be to raise the debt ceiling and get a 2 year agreement on the budget caps. If the latter isn’t done, GDP growth will take a 0.3% hit in 2020. 

On May 21st, Senate Majority Leader, Mitch McConnell, stated, “We are anxious to to reach a caps agreement. Our hope is to make a deal before the day is over.” Obviously, a deal didn’t get done on that day, but it will probably get done in early June if everything goes well.

Dow Down - Conclusion

The stock market is modestly oversold, but that’s what happens in corrections. Stocks should fall about 10% in total if a few more economic reports are consistent with the durable goods orders and Markit PMI reading. 

Don’t worry about the debt ceiling being passed, but follow negotiations closely because there needs to be a deal on budget caps or else fiscal policy will hurt GDP growth by 0.3%. 

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1 Comment

  • Austin Harris

    May 28, 2019

    Great article, thanks John