Tone-Deaf to Midterm Election Uncertainty and Trade? – Week Ended 9/21/18

US indexes continued their ascent higher during the third week of September, with the S&P500 adding +0.9%.  The Dow, which tends to be a bit more heavily influenced by industrial sectors and the traditional goods-based economy (rather than services), fared even better with its add of +2.3%; that narrows its relative performance disadvantage against more services and technology focused sectors which are generally leading the domestic charge higher YTD.  Transportation and Industrials, two areas watched by Dow theorists for economic signal, have also outperforming the broader market recently giving encouragement and a more optimistic thesis on the prospects for the market to continue on its march higher.  International markets, which have been the most notable black-eye for diversified investors and those believing foreign markets represent a less expensive opportunity set, are also enjoying relative outperformance so far in September.

From an economic standpoint, the biggest negative remains trade-related tensions.  The US seems to be working through differences between NAFTA partners (Mexico and Canada) as well as Europe, but interactions with China continue to feel more mutually combative.  It is almost daily where fresh headlines reporting friction between the US and China are in view, making it difficult to know what threats have actually been implemented vs. those that are simply new barbs in the pursuit of motivating earnest negotiation.  Domestically, we were hearing concerns about some weakness developing in housing, but several measures last week suggest the sector is still hanging in there despite rising mortgage rates, lumber prices, and disappointing performance of homebuilders’ shares.  Hurricane Florence is likely to begin negatively distorting some job-related figures in the coming weeks, but the storm’s impact so far feels more manageable than was Harvey, judging from headlines.  Perhaps most important, the yield curve enjoyed notable steepening in the last week which helped the shares of banks.  This is significant because coming into September the curve was increasingly flat and the Fed’s expected additional hike to short-term rates again this week was believed by many to inch the curve closer to the ominous point of inversion.

Historically, September and October carry a reputation as being one of the worst months to be an investor.  This month began soft, but it has come on stronger.  This is somewhat surprising when considering the dynamics of trade and midterm election year uncertainty.  There is the widely held expectation that Republicans will lose control of Congress and further undermine the Trump administration’s ability to advance desired policies.  History shows mid-term election years ordinarily are positive, but the positive performance tends to arrive during the 4Q.  But with domestic equities presently trading back at all-time highs and the mid-term election a little more than a month away – we can’t help but ponder if stocks are due for some near-term weakness.    Could 2018 be a “this time is different” moment, fueled by a Democrat-congress weakened Trump administration and an undesirable/unexpected transition of current trade-war rhetoric with China turning into full-scale trade war?

Posted in Blog Post.