Stock Market: Four Reasons Why It Will Continue to Fall
Here are four reasons why the stock market will continue to fall, starting with contracting earnings and revenue.
On June 30, analysts were expecting S&P 500 companies to report a decline of one percent in corporate earnings. As of September 25, they now expect a decline of 4.5%. (Source: FactSet, September 25, 2015.) Revenue is projected to decline 3.3% in the third quarter after declining in the first and second quarter of this year. The last time we saw something like this happen (three consecutive quarters of revenue contraction), it was between the first and the third quarters of 2009.
Six-Year Dow Jones Industrial Average Trend Line Clearly Broken
Major stock market indices are no longer trending upwards. Below is a chart of the Dow Jones Industrial Average from late 2007. Pay attention to the black trend line I have drawn.
Chart courtesy of www.StockCharts.com
The uptrend in the Dow Jones that began in 2009 is now clearly broken. The most basic rule of technical analysis: the trend is your friend until it’s broken. That six-year uptrend is now broken.
Thirdly, the smart money continues to ditch stocks. The chart below is of the National Association of Active Investment Managers’ Exposure Index. It shows the percentage of stocks that money managers hold in their portfolios.
Chart courtesy of www.StockCharts.com
As you can see from the chart, money managers have pretty well exited the stock market. Their portfolios consist of less than 20% stocks; earlier this year, it was close to 100%. This massive reduction in stock positions shouldn’t be taken lightly.
Finally, the global economy continues to suffer. China’s economy is at the forefront, and other major economic hubs around the world are struggling, too. American companies have exposure to the global economy, with roughly 50% of all revenue for S&P 500 companies coming from outside of the U.S.
In an environment where the global economy is slowing down and the U.S. dollar is high, earnings of the S&P 500 companies are affected and that impacts stock prices of the S&P 500 companies and the multinationals that compose the Dow Jones Industrial Average.
Stock Market Outlook for the Fourth Quarter Dismal
From the beginning of 2015, I had predicted this would be a down year for stocks—and it has been. In the third quarter of this year alone, key stock indices like the S&P 500 dropped nine percent. I expect losses for stocks to mount because of contracting earnings and revenue, a clearly broken uptrend in stock prices, major investors getting out of stocks, and a slowing global economy.
