Markets evaluate the risks. And that is what markets are expecting, although September’s pullback suggests doubts are increasing. Those doubts, however, are based on looking back at the past month or so and could easily be assuaged by stronger medical and economic performance. The market’s economic foundations are still reasonably solid—what appears to have been shaken is confidence, which will improve with the data.
Solid fundamentals. Supporting the idea that the fourth quarter will be better are the fundamentals. Earnings are expected to continue to come in strong. With margins up and sales holding, corporate earnings are expected to rise by 30% or more in the third and fourth quarters. Companies continue to sell more and to keep more of the sales as profits. From a business perspective, confidence remains high, and the results are justifying it. A recovery in the medical news and consumer confidence should help keep those positive trends on track.
More positive factors. Another potential positive factor is that even as the market is shaken by both an economic slowdown and the prospect of higher interest rates, those risks offset each other. If the economy does remain weak, that will likely keep interest rates low, which will support the market. Here, too, while there are real concerns, there are also significant positives.
Outlook Remains Positive
While October and the fourth quarter will face challenges, the outlook remains positive. The actual outcome remains unusually uncertain, and the risks we saw in September are real. But there are also signs those risks may be fading—and that the very real positive trends from July and August will reassert themselves. September was the month when the markets started to take the risks seriously. October will be the month when we find out if that continues or if the improving trends turn it back around.
Brad McMillan is the chief investment officer at Commonwealth Financial Network.