On the heels of a September which was generally attractive, the markets entered October again looking spooky. In fact, like a year ago where the high for the year was observed on September 21, the S&P500 was off almost 4% between September 20 and October 2. That could be eerie for anyone paying close attention. In recent weeks, the US economic picture seems to be getting increasingly muddied by the sluggish international backdrop as fresh data ranging from manufacturing, services, inflation, and jobless claims all appears to be confirming a broad slowdown observable via downbeat readings coming in from abroad. Some meaningful market action reprieve arrived late last week as the US President offered a more optimistic narrative around current trade talks with China at the same time as reports of productive Brexit negotiations (a more than 2-year uncertainty at this point) we hitting the wires. Both domestic and international stocks jumped higher to end last week.
For most of the year, investors seem to be giving US equities the benefit of the doubt – largely on the perspective that consumer spending makes up more than two-thirds of domestic economic activity; and the mood of those consumers remains generally supportive. But just how durable is that mood? Hiring activity appears to be slowing (may be partially due to a very low unemployment rate), and CEO/business leader confidence appears waning and at the lowest level since late-2011. The latest phrase to be gaining traction is “stall-speed”, and uncertainty around trade is damaging business confidence. The thought goes that if business leaders become more cautious and reluctant to invest in new plant, property, equipment, or hiring, it will not take long to filter down to consumers. But consumers – who are feeling a wealth-effect from a 10-year bull market and home prices supported by low interest rates – can continue to smooth the experience. This can arguably continue as long as the stock market does not crash; and home prices remain stable to increasing.
Strategas Research Partners, a respected economic research firm we follow, offers that the amount of bad news and economic pain appears to be at a point where stimulative policy changes are occurring. Said differently, the world is actually feeling the impact of the ongoing trade spat in a measurable way. Data clearly reveals that not only are the US and China are feeling it; but Europe is getting hit at least as often and hard by the crossfire. Most policy makers (including the US central bank) did not choose the trade war, but they nonetheless are feeling its impact. On that score, the US yield curve steepened last week across several key maturities, suggesting that the market believes the policy mistake of too-tight monetary policy (in the US at least) is being walked back. Yields internationally are also stable in recent weeks (not making new lows). Investors would be wise to consider these policy shifts before allowing themselves to get too wrapped up in the flow of the daily news. Unfortunately, with the tremendous amount of persistent uncertainties, it is equally challenging to envision a scenario where the market can move to decidedly new highs in the absence of clarity around some of the key issues. Perhaps that’s why investor sentiment appears so sour (fewest “bulls” since last December); yet poor sentiment can be a supportive paradox: when so much bad news is priced in, it’s easier for expectations to be exceeded and better than average forward returns result. Bottom line: be careful, but avoid temptations to abandon the asset mix appropriate for your time horizon and purpose.
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