When Everyone is Selling Stocks Out of Fear, It's Time to Buy

On Tuesday morning, I was on Fox Business News talking about the recent market volatility.

When the split screen on my monitor showed the other guest was dressed as a cow, I thought I had missed Halloween.

Thankfully, he wears that every day.

You can view the segment here:

Cheryl Casone of Fox Business steered the conversation away from some points I wanted to make. So let me take this opportunity to offer some clarity on the recent market events and where we are likely headed.

The Fed Puts the Brakes On

October was the worst month for the stock market in 10 years.

Not just the worst October in 10 years. The worst month in 10 years.

At Tuesday’s close, the S&P 500 Index had dropped about 10% on the month.

Why is this happening now?

There are a number of explanations for October’s market sell-off. The most obvious is that the Federal Reserve is tapping the brakes on the economy, and the stock market is telling you it’s working.

On September 26, the Fed raised rates to 2.25% and removed the word “accommodative” from its statement.

The government bond market responded immediately, as 10-year yields surged from 2.85% to 3.25% in late September and early October.

The Fed statement caused the prevailing market narrative to shift. It went from worries that the economy was overheating and stocks were melting up, to worries that the economy is on the verge of a recession and stocks are collapsing.

In millennial-speak, we went from FOMO (fear of missing out) to rekt (wrecked).

Fear Selling Is Everywhere

Sentiment follows price.

As the market declined, the list of grievances added up.

Investors initially dismissed, but are now worried about:

Chinese growth, which dropped to 6.5%, the lowest in a decade.
Infinite tariff battles (Caterpillar, 3M and Illinois Tool Works’ earnings are weaker as a result).
Lack of tech leadership after Amazon dropped 20% on weaker-than-expected earnings.
The Fed trying to thwart the president’s agenda.
A Democratic sweep in the midterms and the reversal of pro-business policies.

Fear selling is everywhere.

The CBOE Volatility Index (VIX) has doubled from 12 to 24.

CNNMoney’s Sentiment Index is showing a reading of 7 out of 100, well into “extreme fear” territory.

They love you when you’re up, kick you when you’re down.

I’m Optimistic

None of this mattered until the market sold off. Lately it’s mattered, bigly.

I’m optimistic about this market. I still think there’s good news out there that can turn this decline around and take us higher into the new year.

Here’s some good news to think about:

Fed Chair Jerome Powell’s glass is now half-full. He has 225 basis points of room to cut rates! If there’s one thing I know about the Fed, since the days of Alan Greenspan, it’s that it is always there to cut rates to stave off a bear market. Powell is cut from the same cloth as Greenspan.
The yield curve is flatter than last year, but not yet inverted. The banks can still profit by borrowing short and lending long. As long as banks are profitable, credit continues to flow and the economy expands.
The odds for another Fed hike in December dropped by almost 20% in the past week. That means traders are starting to buy into my theory that the stock market will force the Fed’s hand.
CNNMoney’s Fear and Greed Index is at 7/100, the lowest level since February. Fear is everywhere — that’s typically time to buy, not sell.
Short-term interest rates ahead of the last two recessions were much higher. They were 6.6% in 2000 and 5.25% in 2008. If your business can’t expand with a 2% interest rate, maybe you shouldn’t be in business after all.
Consumer confidence is still near an 18-year high. That means Santa is going to be good to the kids this year, and the retailers (of course).
Friday’s employment report is still expected at 190,000 jobs added. Good news for the economy has meant good news for the market.
A Democratic wave might mean marginally higher corporate taxes, but might also lead to a bipartisan infrastructure plan. This is bullish for economic growth, and good for infrastructure stocks such as Vulcan Materials Co. (NYSE: VMC), Martin Marietta Materials Inc. (NYSE: MLM) and Jacobs Engineering Group Inc, (NYSE: JEC).

There are plenty of reasons to believe this sell-off is temporary and the market will close the year higher. Even the guy dressed as a cow is feeling optimistic.

Regards,