February was a difficult time for investors, having to grin and bear the first market correction in roughly 2 years. Some investors in the market threw in the towel so to speak, others staid the course and were rewarded for their longer-term vision. And so here we are once again on the cusp of another SPX correction, but… but with nearly 3 quarters worth of economic and corporate earnings growth in the rear view mirror, staring at another quarter ahead that may prove to produce 20% YOY earnings growth and consumer spending that is accelerating to various degrees; sounds promising right? Well of course for every pro there is a con and I’ll touch on those cons later. But before I do let’s look at the week that was.

Major Averages & Expected Move Ahead

The S&P 500 experienced losses 4 out of 5 days last week and neared a correction on Friday, closing 9.28% below the record close. Friday saw a loss of 1.73%. The index is down 3.9% from last week and now in negative territory for 2018 by nearly .5 percent.

These losses add to a sharp drop seen throughout this month. For October, the Dow Jones Industrial Average (DJIA) and S&P 500 are down 6.7% and 8.8%, respectively. The Nasdaq (NDX), meanwhile, has lost 10.9 percent. The Dow is now on pace for its biggest one-month decline since May 2010, and the S&P 500 is tracking for its biggest monthly loss since February 2009. The Nasdaq is set for its largest one-month pullback since October 2008. As Finom Group has mentioned time and time again, such numerous records during a bull market are an indication that indeed, this time is different. Good different or bad different can only be left for discovery and as time will do the telling.

As far as efficiency goes, the market wasn’t terribly efficient this past week. The SPX weekly expected move was $66 and we captured that $66 and then some. The SPX declined by nearly $104 on the week, dramatically overshooting the expected move. Remember, the VIX is now at 24% and with a VIX this high the daily and weekly moves are outsized.

The SPX weekly expected move for this week is $90.  A VIX at nearly 25% indicates daily moves of roughly 1.3% up or down. After the SPX’s least volatile Q3 period since 1963, October has ushered in a wave of volatility. The heightened level of volatility will not and cannot last, but until it subsides, hedging can offset drawdowns to one degree or another.

So why has the market been selling off in October? If you listen to media headlines and even the analysts that participate on CNBC or Bloomberg, one would be led to believe it’s the prospects that tariffs and rising rates will take a chunk out of corporate earnings, gross profit margins, and other metric performance indicators. To some degree they are right. With that agreeable comment in mind, can we not recognize the self-fulfilling prophecy they inject into markets? I recognize that FOMC/central bank tightening reduces market liquidity and acts as a headwind for equity market appreciation, but the tariffs are a whole other story. At the current stage of tariff implementation, 25% on steel, 10% on aluminum and 10% on $250bn in Chinese imports, it’s simply not enough to derail the U.S. economy or SPX earnings on the whole.

UBS analysts said the trade concerns are mostly limited to certain industrials and semiconductor companies. For instance, chip makers Texas Instruments (TXN) and AMD (AMD ) both issued disappointing fourth-quarter outlooks. Texas Instruments said demand is weaker and it is not stocking up on inventory ahead of tariff implementation. Analysts at UBS say they are not factoring in much impact at all from tariffs. For next year, they expect earnings to grow by 8.6% and just 6.6% if current tariffs and those threatened are implemented.

“UBS chief U.S. equity strategist Keith Parker said the tariffs aren’t really showing up in Wall Street’s 2019 forecasts yet, but they have dented fourth-quarter growth by about a percentage point. Typically, in the month of October, analysts in aggregate chop an average 1.4 percentage points off the next year’s earnings growth forecasts. But this year, there is no change and the number is basically flat. The consensus for 2019 earnings growth is 10%, on average very low.”