Client Note 

October 1, 2019

In contrast to August, September has seen the S&P500 generally trend up, moving up from 2900 to 3020 (+4%) and now back to 2977, just under the July 3 level, for a gain of approx. 1% on the quarter.    We are boxed between the 3000 and 2900 levels producing essentially flat or down equity markets over the past month and quarter. Portfolios are flat to slightly down on the month. 

As indicated last month, gold’s (and bonds’) strong year to date gains through August brought media attention to these assets, which often can mean an end to a trend.  Gold is down almost 2% for September and long treasury bond (TLT) off about 3%.   Media attention has vanished towards gold alongside the weakness and attention drawn away to stocks’ attempts at new all-time highs.

Gold has either completed a run up, or this may just be a pause with another run to go.  Over $1475/oz allows us to expect further gains after September’s consolidation.

In all, stock indexes have been very sideways for quite some time.  The Dow is at 26928 now and was at 26570 at the January 2018 high.    The lack of real progress is reminiscent of the 2015 flat market, which also was the last time we had an earnings recession, like today.   A break to the upside should indicate substantial upside for stocks, but a break of the downside (about 2% lower than today) could see further 6% decline and still be in the range over the past 18 months.   Mentioned In my Observations from January 2018, 10-20% swings are common in late stage bull markets and are likely to persist.

The S&P500 was at 2950 at the end of April. Today the S&P500 is at 2980, barely 1% net change over 5 months.  Portfolios over that same time frame are up 1% to over 4% over the same time frame.  Due to higher stock exposure, more aggressive portfolios lagged more conservative positioning over that time.

US economic data continues to be lackluster and growth continues to slow.  China and Eurozone data are very poor, and the interconnectedness of global trade and finance are impacting the US.

Earnings remain in contraction, with earnings ‘growth’ now forecast to be -3% 2019 vs 2018.

Interbank lending had a significant problem in mid-September when overnight rates bank charge went from 2.5% (annualized) to 8%.  To say this is extremely odd is to put it mildly.  99.5% of the time over the past 20 years, overnight rates stay within a quarter percent of the Fed Funds rate.   The Fed has had to reopen emergency repo operations to add liquidity to banks for the first time since 2009.   It is still unknown why banks were unwilling or unable to lend fully collateralized excess cash overnight.

The cannabis sector suffering from slowing growth in Canadian names and now the vaping hysteria has not been able to turn the corner and remains under severe pressure.  I am in the process of fully exiting this area for the foreseeable future.  Add to the list of mini bubbles:  FAANG, Bitcoin, now Cannabis.  We may see another 25% to 30% decline in this sector.


Adam Waszkowski, CFA