Market Update – October 24, 2018
The selling pressure exhibited by the world’s stock markets has not abated over the course of the last couple weeks. In fact, if anything, it has intensified.
As of the market close today, the Dow Jones Industrial Average and the S&P 500 have sold-off sufficiently enough to now stand negative for 2018.
A global stock market index, the MSCI All-Country World Index*, has fared much worse. It has traded down 6.3%1 year-to-date.
I spoke with many clients and industry counterparts today and thought I would relay a few of the more pointed and pertinent questions/observations:
Is the market pull-back of the last week due to the same factors that drove it down in the beginning of the month?
While the drivers that we dissected in the Market Update of 10/11/18 are still prevalent (higher costs of capital and trade wars/tariffs), their attribution has faded. In fact, thankfully, there has been a restoration of negative correlation over the course of the last week.
By that I mean: when stocks have historically fallen, bonds have rather reliably rallied. The theory goes something like: when investors turn risk on, they do so by buying stocks and selling bonds. When investors turn risk off, the inverse is enacted.
Using the last couple days as an example: while the S&P 500 has dropped, bonds prices have climbed, and their yields have fallen. When risk is turned off, as it is now, investors seek safety – they increase demand for high quality, low-risk alternatives – and in the process raise its price. In this regard, bonds have offered a port in the storm. This is very unlike the moves in the markets at the beginning of the month.
The most recent spate of selling, in my opinion, is due largely to the disappointment in the outlook for earnings growth expressed on companies’ quarterly conference calls. We are currently in what is known as, “earnings season”: when public companies report their profits and projections to the investment community.
And since the stock market is a “discounting mechanism,” it attempts to impute the prospects of tomorrow in the prices of today.
Finance geeks the world over employ present value calculations and discounted cash flow models to ascertain the direction of future prices. When an input of those models possesses a reduction in its rate of growth – or worse, an outright decline – the output tends to turn pretty pessimistic.
Given the dominant strength in specific market sectors and regions over the course of the last few years (namely information technology & consumer-discretionary in the US), a re-rating of their prospective growth potential can instigate the recent waves of volatility that we have experienced. And, like any actual wave, those of the market variety can possess a rip current that pulls unassuming sectors down as well.
How much of the recent volatility and market drop is due to President Trump’s public criticism of Fed Chairman Jay Powell?
I think little-to-none. As former Fed-Head Alan Greenspan was quoted the other day on CNBC, “Trump’s criticism is nothing new for US Presidents.”
(For the full interview, click: https://www.cnbc.com/2018/10/18/greenspan-says-that-before-trump-other-presidents-criticized-fed-policy-all-the-time.html)
Think about it: Cheap money is a stimulant. Markets tend to perform well on stimulants. Rising markets reflect positively on a sitting administration. And positive sentiment tends to poll well on the campaign trail…offering a president more time to promote their party platform.
So, certainly, President Trump wants low rates. In that fashion, he is not unique. And perhaps only in that fashion.
Theoretically, the level of interest rates can ignite a virtuous circle or a vicious cycle for the party in power.
Make no mistake, Jay Powell has no incentive to stymie economic growth or equity market advances, but his is a charge with a time-line far longer than the average stock investor or a US President. Anyone in his position must project the downstream consequences of their decision-making over a full market cycle.
I think Jay Powell is doing a good job. I think he is still coming to grips with the gravity of his statements and the influence of his actions, but I do not suspect he’ll alter his intentions due to political pressures.
Are the mid-term elections causing consternation in the financial markets?
I do not believe that the elections are catalyzing the market’s volatility or its recent pull-back.
I do believe that the House has a better than average chance of going to the Democrats and the Senate an equally high likelihood of remaining under Republican control.
I believe that mostly because it is the consensus thinking in the data that I read and the polls that I monitor. (If you’ve not gone onto www.realclearpolitics.com, check it out when you have a chance – I find it to be a balanced representation of news from both sides of the aisle).
I also believe that because in every mid-term election since the Civil War, the party of the president has lost, on average, 32 House seats and 2 Senate seats2……history has an uncanny way of repeating itself.
Since we are talking about politicians, I feel comfortable in completely contradicting myself with the next point……
…….markets do tend to exhibit a seasonal pattern of choppy trading ahead of the mid-term elections (See chart below). So, despite all of the unique markings of this spate of sloppiness, the pattern of repetition, at a minimum, does rhyme. It will be interesting, and encouraging, if the market does find a firmer footing as it has in the past to complete the fourth quarter.
Months like October are frustrating and the media’s magnification on the melee does not sooth the psyche. Please reach out at any time to discuss the implications of the market’s moves on your portfolio with the team here at Kavar. Let’s also take this opportunity to reinforce the benefits of portfolio balance, long-term objectives and contrarian-leanings in our investment strategies.
*This index is comprised of 56% US-based stocks and 44% foreign stocks.
1 Source: Bloomberg Market Data
The views expressed herein are those of Doug Ciocca on October 24, 2018 and are subject to change at any time based on market or other conditions, as are statements of financial market trends, which are based on current market conditions. This information is provided as a service to clients and friends of Kavar Capital Partners, LLC solely for their own use and information. The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as, investment, legal or tax advice. Past performance does not ensure future results. Kavar Capital Partners, LLC makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based on information that Kavar Capital Partners, LLC considers reliable, it is not guaranteed as to accuracy or completeness. This information may become outdated and we are not obligated to update any information or opinions contained herein. Articles may not necessarily reflect the investment position or the strategies of our firm.