Our post-Brexit US equity market stall could well be a foreboding of turbulence for investors in coming months. After a second consecutive week of flat performance for US equity market indices, there are clear signs that investors are stepping way from the market, as is evidenced by the slumping volume metrics.
Though I have been calling for precisely this type of price action in markets in recent weeks, we have received further evidence that investor enthusiasm has begun to wane, other than simply a pull back in volume.
In part, recent Fed official jousting over the timing of the next interest rate rise has given investors something to think about. It had been widely viewed that the Fed was likely to take a “wait and see” attitude after the Brexit vote in expectation that there would be capital market fallout as a result of the vote. Not only wasn’t there any fallout for US markets, they rallied the most they have in over a year. The Fed has waited for the variable to be digested by markets. There has also been lingering doubts as to whether the US employment picture would continue to show gains…but by now they clearly have. As a result, the timeline for a move in rates is very much back on the table. However, I still don’t expect a move on rates before December – if one occurs this year.
Another reason equity price appreciation has stalled is a result of the continuing corporate profit slump and a steady stream of earnings revisions for coming quarters. In fact, corporate revenue growth for Q3 is now negative – after being as high as + 8% earlier in the year. Guidance provided in Q2 earnings calls has largely left investors unenthusiastic.
Stretched valuations on all major US equity market indices, slumping volume metrics, a stall in price appreciation this month and the fact that equity indices are resting at all-time highs all feed into a narrative that act as a headwind to gains. The more likely scenario is that we see prices pullback in the 5% – 7% range before the presidential elections.