The stock market has been a more volatile than usual over the last few weeks as investors contend with the latest global economic data, eye the yield curve, question what the Fed will do next and brace for the next round of trade talks.
As if that wasn't enough, we've also witnessed mixed June quarter retail earnings, which are now getting factored into second half of 2019 earnings-per-share expectations for the S&P 500. At the same time, the velocity of corporate buybacks has slowed, Washington is scrutinizing tech companies, and consumer confidence is waning.
All in all, these have led to swings in the market based on the most recent headlines, and that can make for a challenging time in the market and for investors.
Thursday morning, we received the first meaningful piece of August economic data in the form of the IHS Markit Flash PMI data for the month, and in aggregate, it confirms the global economic slowdown. To date, the U.S. has been the best house on the slowing economic block, but Thursday's data, which showed the domestic manufacturing sector contracting for the first time in a decade means the trade war and uncertain environment are weighing on the economy.
During periods of uncertainty, whether we're talking about companies or people, the natural instinct is to pullback, wait and assess the situation. For both people and companies, dialing back spending is an arguable course of action when faced with uncertainty, but from an economic perspective that translates into a headwind for growth. We're seeing that headwind in the day's Flash PMI data.
Aside from the headline, U.S. Flash Manufacturing PMI hit 49.9, marking a 119-month low; the index's new orders component put in its weakest reading since 2009. Per the report, "Survey respondents often cited subdued corporate spending in response to softer business conditions and concerns about the global economic outlook."
But as we saw with last week's July Retail Sales report, consumers continue to spend, despite rising debt levels and banks are starting to report a pick-up in delinquency rates. The question that is coming to the forefront of investor minds is whether consumers will be able to spend and keep the economy chugging along during the all- important holiday shopping season that will soon be upon us?
Looking at the August Flash PMI data for the eurozone, the slowdown continued as well, but the report also registered a "sizeable drop in confidence regarding the 12-month outlook" with sentiment down to its lowest level since May 2013. Digging into that report we find new order growth in Germany, the largest economy in the eurozone, falling to its weakest levels since early 2013. The August data for the region confirms current forecasts the region is likely to hit just 0.1%-0.2% Gross Domestic Product in the current quarter. Another round of weak data, and odds are we'll soon see recession fears rising ahead of the European Central Banks upcoming mid-September monetary policy meeting.
If we were to step back and look at the data, what we are seeing is data that points to a continued slowdown with some bright spots. Granted those bright spots are also somewhat mixed and there are reasons to be concerned over the sustainability of those bright spots. Is it any wonder then that the CNN Money Fear & Greed Index has been firmly in "Extreme Fear" for the last week? In a word, no.
During periods of Extreme Fear, the jittery market is bound to overreact, and the fact that we are in one of the seasonally slowest times of the year for trading volumes means market reactions will be even more extreme one way or another. The danger for investors is to get caught up in the turbulence, and it can be rather easy to do, especially if one is looking to pile onto a money-making trade, be it a long or short one. This makes headline grabbing, bold assertions increasingly digestible, like the one from hedge fund hired-gun Harry Markopolos on General Electric (GE) or rumor mongering like the recent one that drove the recent pop in shares of Tesla Motors (TSLA) .
Rumors and assertions are tricky things, and while some may turn out to be true, others may only have a whisper of truth, if any at all. In the case of Markopolos, he's working with an unnamed hedge fund partner, and while it would be wrong to cast wide dispersion on the industry, the reality is it is hurting. In 2018, eVestment hedge fund performance data showed the overall hedge fund industry returned negative 5.08%. While the industry is in positive territory on a year-to-date basis this year, it still meaningfully lags the major market indexes.
The bottom line is that in a market environment that is teaming with uncertainty on several sides, it is even more important that investors continue to focus on the data rather than be led astray by rumors and conjecture. Whether it is digging into a company's financial filings; cross referencing conference call transcripts across a company's competitors, customers and suppliers; or wading deep into the economic data, now more than ever it is important to do the homework rather than simply piling onto an idea that could simply be one person talking his or her trade book.
Along the way, you may find something that helps put some of those potentially over-the- top assertions into perspective. One such example is found in the work by Bronte Capital that took Markopolos' assertion that GE's industrial margins near 15% are "too good to be true" to task by comparing them with similar margins at Honeywell (HON) , Emerson Electric (EMR) and others. Once again, digging into the data adds that layer of context and perspective that is both helpful and insightful to investors.
In our experience, making a trade without doing the homework first and getting conviction on the thesis rarely yields the hopium expected. If the homework checks out, it offers confidence and conviction in the position. Periodically checking the data to determine if that thesis remains on track can either keep one's conviction running high or alert to a potential issue. Not doing the homework leaves one vulnerable to a change they might not even known was coming.
This commentary was originally sent to subscribers of TheStreet's Trifecta Stocks.