November 3, 2019

After a week September, equity markets came back to life in October with the S&P 500 gaining about 2.2%, Euro Stoxx 600 up almost 6% (equal now to April ’19, but still 11% below all-time high from Jan 2018), emerging market stocks gained 4% (remain under April ’19 level, and about 20% below Jan 2018). Aggregate bond index was flat on the month, gold gained 2.5% but remains sideways over the past couple of months.    Portfolios gained across the board, .75% to about 2% on the month.   Our recently added individual stocks continue to do well supporting our core ETF holdings.

Stocks appear to be moving up out of the range we have seen the past several months on the hopes of a trade deal with China and that the current earnings recession is about to end.

Open Interest in gold futures has declined by about 20% as prices have gone sideways and media attention has waned.   At the same time prices have gone sideways and appear to have consolidated enough to provide another base from which to stage another modest rally.

Market driven interest rates have climbed, fallen and climbed again, since August and are consolidating.  With economic numbers (showing the recent past month) have begun to slow their decline (still contracting in durable good, manufacturing) the Fed is indicating less willingness to commit to additional rate cuts.  If data remains ‘less-bad’ I don’t expect a rate cut in December.

Recently we’ve seen very low expectations in employment, earnings and economic data come in ‘less-bad’.  Employment gains were expected at 75k (very weak) to 128k (middling, barely keeping pace with population growth); earnings decline for Q3 year over year at -1% (expected at -3%) and manufacturing PMI slip to 48.3, but greater than expected 47.8 (both indicate contraction).   So, with data not being worse than feared appears to have given market participants confidence that this year may be similar to 2015/2016 and that this bout of weakness will pass.

Western economies grow with credit growth.  In my October Observations, we see how China’s credit impulse impacts US economic data. China’s credit impulse has gone from declining to flat which I believe is the source of our no-longer-falling-but-still-weak economic data.  The Fed restarted a form of QE in September putting in substantial liquidity (comparted to the drain previously) and should give rise to good data in December and January.  If this is temporary remains to be seen.

The US dollar has broken down and may signal an end to its climb (and some decline) which should bode well for commodities which have been added to portfolios.  Oil is on the sidelines still as its in the middle of its 12-, 6-, and 3-month ranges!   We may also see (as mentioned previously) outperformance in ex-US equities (affirmative past 90 days).

 

Adam Waszkowski, CFA

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