Domestic equity markets remain up +1.1% in November, but the sailing is anything but smooth. The S&P500, along with most international markets, struggled for direction throughout most of last week. In fact, most days were characterized by sharp reversals – either beginning a session favorably but bleed throughout the day; or sharply negative only to bounce higher. Short-term intra-day reversals are just one symptom of a market that is uncertain how to reconcile still strong US data, against signs that same data may be peaking or is at risk if various policy stress points such as trade or interest rate policy do not diminish soon.
From an economic perspective, it feels like a broken record. Data in the US is supportive and in no way suggestive that an economic recession should appear anytime soon. It may be that the biggest risk to US growth is foreign weakness. We learned last week that both German and Japanese GDP contracted during the 3Q. Both can at least be chalked up to one-off hits (euro auto regulation, and weather disruption in Japan), but weakness is increasingly a headwind to the US which has been single-handedly carrying global progress in 2018. Too, if those economies experience a contraction to activity again in 4Q they will be declared in technical recession. Global economic weakness also helps explain recent strain in the prices of input commodities like oil. On our own shores, US housing appears soft beyond what can be attributed to the weak stretch of the calendar or bad weather. Higher interest rates appear to be taking a bite out of that activity and other big purchases that usually require financing. If there is a silver lining to these soft economic data points (international growth, US housing and autos activity, commodity prices), it’s that a meaningful message to policymakers should be getting louder: the communicated timetable and preference for how high rates might need to go this cycle is both too aggressive and incorrect. Rather, the Fed may be much closer to the end of this monetary normalization/hiking cycle than it previously thought. Similarly, the Trump administration may be starting (and wise) to signal a preference for striking a deal to resolve issues with China – even if such a deal might be relatively temporary. Given how volatile has been the situation between Trump and China, this outcome is anything but consensus, but make no mistake that China’s economy has slowed dramatically in 2018 and a deal with the US is certainly in their best interests too.
Since the month began, the most challenged area of the market is that which performed the best through the end of the third quarter: high-flying technology names. Businesses that require continued robust growth and lots of capital are more vulnerable to rising costs of financing than those with more managed balance sheets and less capital intensity. Perhaps that is one reason why value-styles seem to be faring better in recent weeks. Too, are investors finally waking up to the dramatic disconnect that’s been building over most of the last two years and viewing value as both a more defensive ingredient to stock market participation and attractively priced? As far as the broad market is concerned, we still believe the prevailing direction into year-end is up and mindful of supportive post-midterm election historical data. We believe both President Trump – with the clock now ticking on the 2020 election will strive to boost the economy (and stock market); and the Fed certainly does not desire to short-circuit the economy which just this year achieved levels of unemployment and inflation traditionally considered healthy. Still, the biggest question investors will wrestle is whether policymakers can “stick the landing” and let the air out of the inflation balloon slowly without causing something to pop. In the short-term, the situation with China and Fed communications are the key global macro items driving markets. A thaw on that front could provide a quick pop higher for investors with enough intestinal fortitude (or discipline) to look through the choppy waters.
We wish you a Happy Thanksgiving!! Thank you for the ongoing opportunity to be a resource to you.