Another Steep Selloff, With Earnings on Deck

Summary

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WSJ Your Money Briefing

Episode: "Another Steep Selloff, With Earnings on Deck"
Date: October 11, 2018
Host: Charlie Turner
Guest: Akane Ohtani, Markets Reporter, The Wall Street Journal

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Episode Overview

This episode of "Your Money Briefing" focuses on a dramatic two-day selloff in U.S. stock markets, the volatility rattling traders, and the looming third-quarter corporate earnings season. Host Charlie Turner speaks with reporter Akane Ohtani to unpack the causes of recent market jitters, the interplay of inflation fears, bond yields, tariffs, and how these factors may shape investor behavior in the coming weeks.

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Key Discussion Points & Insights

1. Stock Market Tumult and Volatility

• Market Losses Recap:

  • Dow Jones Industrial Average fell 545 points Thursday, after dropping 831 points on Wednesday ([00:20]).
  • Nasdaq dropped 93 points; S&P 500 lost 57 points.

• Volatility in Focus:

  • Akane Ohtani (00:54):
    “We saw a period of 20 minutes at one point where the Dow industrials lose about 400 points with no sort of obvious explanation why.”
  • Investors and traders are unnerved not only by the size of losses, but by rapid, unexplained swings during trading hours.

• Market Sentiment:

  • Morning futures appeared positive due to a weaker-than-expected Consumer Price Index (CPI), suggesting subdued inflation, but optimism quickly vanished ([00:54-01:47]).

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2. Drivers Behind the Selloff

• Interest Rates and Bond Yields:

  • Sharp rises in government bond yields, both in October and back in February, have unnerved markets ([02:18]).
  • Akane Ohtani (02:29):
    “If bond yields are rising because growth is accelerating, then presumably we have a situation where the Fed is very much justified in potentially picking up its pace of interest rate increases... which of course then sort of puts more pressure on the stock market.”

• Rebalancing of Investor Preferences:

  • Rising bond yields make bonds comparatively attractive, shifting money out of stocks ([02:29-03:35]).
  • Stocks perhaps had become "overextended" following a strong September, setting the table for a correction.

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3. Trade Tensions and Corporate Earnings

• Tariffs & Corporate Costs:

  • U.S.–China trade war and mutual tariffs are beginning to be cited by companies as increasing their production costs ([03:35]).
  • If tariffs drive up costs and feed inflation further, this could spur the Fed to raise rates faster—a double-hit for stocks.

• Earnings Season Uncertainty:

  • Beginning of third-quarter earnings reporting on Friday, with major banks (JPMorgan, Citigroup, Wells Fargo) on deck ([04:30]).
  • Tariffs and interest rates are now being mentioned more frequently by companies as sources of risk.

• Buyback Blackout:

  • During earnings season, companies typically pause stock buybacks—removing a key support for stock prices ([04:54]):
    “Corporations have traditionally been one of the biggest sources of buyers for the U.S. stock market. If these companies are not able to buy back their shares during the earnings reporting season, that removes another level of support for the market.”

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4. Outlook: More Volatility Ahead

• Short-Term Expectations:

  • Traders are broadly bracing for continued volatility as earnings roll in ([04:54]).

• Historical Perspective:

  • This week could be the most severe since February 2018, and for some indexes, possibly since 2016 ([05:33]-[05:43]).

• Correction Territory:

  • Nasdaq entered "correction" territory—down 10% from the 52-week high ([06:01]).

• Room for Optimism?

  • Despite turbulence, tech firm earnings have been robust; some investors eye a bounce-back, but caution remains as many stocks still show large year-to-date gains ([06:13]):
    • Akane Ohtani: “A lot of these tech companies have impressed people so far with record profits... On the other hand, I think investors are still wary of the fact that a lot of these names are still up like 40% for the year.”
      ([06:13])

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Notable Quotes & Memorable Moments

• Akane Ohtani on Market Volatility:
  “It was another one of those days where you sort of take your eye off the markets for a minute and then things are completely in another direction.” ([01:56])

• On the Fear Factor:
  “That's been sort of scary for traders to watch just the last two days: how volatile the action has been, not just in the stock market but also in bonds and commodities and things like the VIX.” ([01:56])

• On Earnings Season's Impact:
  “What the banks say will certainly set investors’ expectations and set the tone as we head into the rest of the third quarter reporting season.” ([04:54])

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Key Timestamps

• 00:20 – Market recap, opening of discussion
• 00:54 – CPI surprise and opening volatility
• 01:47 – Magnitude and unpredictability of swings
• 02:18 – Fed, interest rates, and impact on stocks
• 03:35 – Trade feud and corporate earnings concerns
• 04:30 – Anticipation for bank earnings and buyback blackout
• 05:33 – Historical context of the week’s losses
• 06:01 – Nasdaq correction territory and tech stock outlook

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Conclusion

This episode offers a clear, real-time account of the forces shaping what became a week of exceptional market stress in October 2018. Host Charlie Turner and reporter Akane Ohtani bring context to the volatility: fears around interest rates, the Fed, tariffs, and a pivotal earnings season. Listeners are left with a sense that market uncertainty is likely to persist, with more turbulence expected as third-quarter earnings results unfold and major economic factors remain in flux.

Transcript

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. [e-mail] Washingtonwise.

[B]

With your Money briefing. I'm Charlie Turner at the Wall Street Journal in New York. Thursday saw another dismal session for US Stocks. On the back of Wednesday's huge tumble. The Dow Industrials FEL 545 points. Following Wednesday's 831 point loss, the Dow is now sitting just above 25,000. The Nasdaq Composite fell 93 points Thursday. The S&P 500 lost 57. Joining us is Akane Ohtani, the markets reporter for the Wall Street Journal. Akani, Thursday's session was quite volatile, especially during the morning, wasn't it?

[C]

That's right. We actually thought that the market might have a better session because before the market opened in US Trading, we saw CP that came in weaker than economists had been expecting. And one of the big concerns that people have been talking about throughout the year is this fear that inflation is accelerating and that in turn that's going to push the Fed to have to pick up its pace of interest rate increases. And with the CPI print that was just 0.1% increase in September, folks were thinking, oh, okay, maybe that concern is sort of off the table for now. So we actually saw stock futures bounce higher, but then it gave way very quickly to the selling that we saw throughout the trading day and more of this volatile sort of sudden selling as well, where in a period of 20 minutes at one point we saw the Dow industrials lose about 400 points with no sort of obvious explanation why.

[B]

I guess the Dow at one point was down nearly 700 points and the major indexes really seem to be bouncing around at least a couple points.

[C]

Yeah, it was another one of those days where you sort of take your eye off the markets for a minute and then things are completely in another direction. And so I think that has been sort scary for traders to watch just the last two days how volatile the action has been not just in the stock market but also in bonds and commodities and things like the vix.

[B]

Akani, what are the problems facing the markets? The rise in bond yields, which I guess paused on Thursday. That coupled with rising interest rates and speculation about what the Fed might or

[C]

might not do, that's certainly part of it. I think whenever we see a sharp rise in government bond yields like we have seen in October and also Back in February when the market also tumbled. It does raise the question of where this leaves the Fed. And if bond yields are rising because growth is accelerating, then presumably we have a situation where the Fed is very much justified in potentially picking up its pace of interest rate increases, which of course then sort of puts more pressure on the stock market because stocks are no longer necessarily the most attractive things out there. Why invest in relatively risky stocks when you can maybe put more of your money into bonds which are essentially risk free? So that's definitely one part of it. And then I think there is this sense that stocks were maybe a little bit overextended heading into October. September has historically been a weak period for the US Stock market. We actually saw a number of major indexes hit new highs. And so a lot of investors were saying, you know, after a long period of outperformance, it might have just been sort of overdue for some kind of pullback.

[B]

What about the trade feud with China, which has resulted in tariffs directed at both China and back at the US hasn't that coupled with rising interest rates or bond yields or fears of rising interest rates, really put pressure on corporations and their stocks?

[C]

So so far we've been lucky in that corporate earnings have continued to come in strong. But I think that is a growing fear and that's something that investors will be very closely watching as the third quarter earnings season kicks off this Friday because companies have started mentioning tariffs a bit more and saying that the tariffs are pushing up their costs of production. And that in turn can some people fear drive up inflation. Which then brings us back to this whole problem that investors have been wrestling with throughout the year. If inflation is going to force the Fed's hand. So the tariffs are definitely another element of uncertainty that's adding some stress to the markets.

[B]

Right now I'm speaking with Akane Ohtani, she's markets reporter for the Wall Street Journal. And you're listening to your Money briefing from the Wall Street Journal. Akani, can we expect more volatility in the short run, especially with major banks including JPMorgan Chase, Citigroup and Wells Fargo expected to report quarterly earnings on Friday?

[C]

I think it's fair to say traders are bracing for more volatility rather than the opposite scenario. Corporate earnings season can always be a little bit of a tricky period because we have all these results coming in. What the banks say will certainly set invest investors expectations and set the tone as we head into the rest of the third quarter reporting season. Also, we'll be in the middle of a blackout period for corporate buybacks. Corporations have traditionally been one of the biggest sources of buyers for the US Stock market. If these companies are not able to buy back their shares during the earnings reporting season, that removes another level of support for the market.

[B]

This has not been a very good month, as you pointed out before, and it's been obviously a lousy week. This is I guess the worst week in quite a while, maybe since earlier in the year.

[C]

Yeah, it depends sort of where in the day we were looking at. But at one point we were looking at certainly the worst week since February, then at other points potentially the worst week since 2016 for a number of major indexes around the world. So definitely this is one of the more severe pullbacks that we've seen in quite some time.

[B]

I heard that the Nasdaq entered correction territory, which is I guess a 10% fall from the 52 week high. Do investors think that some of these stocks are due for a bounce back?

[C]

I think so, especially because their earnings have been relatively strong and that's what people are looking for at this stage of the bull market. They're really looking for signs of strong growth and signs that especially that companies will be able to offset the rising pressures from wages going up, from producer prices going up, from tariffs. A lot of these tech companies have impressed people so far with record profits. Even in the case of companies like Amazon, there is one argum to be made in that front. But you know, on the other hand, I think investors are still wary of the fact that a lot of these names are still up like 40% for the year. And so it isn't surprising if they do continue to sort of plumb lower from here.

[B]

Wall Street Journal markets reporter Akane Ohtani, thanks a lot.

[C]

Thanks for having me.

[B]

And that's your money briefing. I'm Charlie Turner at the Wall Street Journal in New York.

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. But what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.