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  • Writer's pictureJulie Skye

Beware when an elephant enters the room!

I usually edit my posts, but this one, by The Heisenberg Report (read more here) was short enough and (gulp) succinct enough, to just copy and paste two of his predictions:

"If you're in the camp that thinks economic fundamentals and earnings are ultimately the most important driver for long-term returns, there are two elephants in the room.

First, the US economy is decelerating. Last week brought a series of disappointing data including, of course, the worst ISM manufacturing print in a decade and the worst ISM services print of the Trump era.

Friday's September jobs report was of the "Goldilocks" variety (the headline miss was tempered by revisions to August and July and wage growth was subdued despite a 3.5% unemployment rate, which suggests the Fed can cut rates further without having to worry about the Phillips curve suddenly coming back to life to take its revenge), but there's no question that things are cooling off. 136k (the September headline number) is hardly a "blockbuster."

ISM manufacturing averaged 49.4 during Q3. That matters, because going back nearly three decades, when ISM has averaged below 50 for a given quarter (i.e., below the line that separates expansion from contraction), the S&P 500 has posted negative YoY earnings nearly three quarters (69%) of the time.

Second, consensus expects aggregate earnings fell by 3% in the third quarter. That would make Q3 2019 the first quarter of negative EPS growth since Q2 2016. In the same Friday evening note which contains the ISM factoid cited above, Goldman writes that ex-Energy, Q3 would mark the first YoY decline in earnings since Q2 2009."

Several times I've written that, wherest goest earnings, go stock prices. Measure all predictions by earnings: are they going UP or DOWN? Watch this space.

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