Hello all – we hope you had a nice November.
It was another uneventful month for the markets as stocks continued to reach new record highs.
It was another uneventful month for the markets as stocks continued to reach new record highs.
With gains of more than 3% for all major indexes, November was the best month for the markets since June.
The November gains came with very little volatility as stocks slowly and steadily chugged higher. In fact, the level of volatility reached its lowest point in over a year.
The lack of volatility can continue, too. As you can see in the chart below, volatility has historically fallen at the end of the year.
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We think the Fed is responsible for at least some of the reduction in volatility. As we reported last month, they remain very stimulative and signaled no change from that.
They also recently restarted another stimulus program that ended in 2014. At that time, they printed money to buy bonds to lower interest rates to make it easier for people to borrow. This round of money-printing they say isn’t to lower interest rates, but to “stabilize the banking sector.” Either way, the effect is still the same on the market.
They also recently restarted another stimulus program that ended in 2014. At that time, they printed money to buy bonds to lower interest rates to make it easier for people to borrow. This round of money-printing they say isn’t to lower interest rates, but to “stabilize the banking sector.” Either way, the effect is still the same on the market.
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The volatility we did have this month mostly came on announcements over the trade deal with China.
First, remember the “Trade War Cycle” we have seen over and over in this saga:
First, remember the “Trade War Cycle” we have seen over and over in this saga:
This month we saw pretty much the whole trade war cycle.
A “Phase 1” deal was recently announced and the market rallied on the news. Then the Chinese hit the brakes and the deal was put on hold. As the month ended, we appear to be on track for a deal, but we’ve been in this position many times before have nothing to show.
A “Phase 1” deal was recently announced and the market rallied on the news. Then the Chinese hit the brakes and the deal was put on hold. As the month ended, we appear to be on track for a deal, but we’ve been in this position many times before have nothing to show.
One of the holdups has been on the transfer of intellectual property (if a business wants to operate in China, the business must hand over its trade secrets to a Chinese partner who then inevitably steals them and cuts out the U.S. business). The Chinese have balked at this request to stop stealing company secrets since this is more of a way of life for them.
It reminds me of an event in China from 2013, where the Chinese high-school aged children must take a rigorous standardized test for college and career placement. Cheating on the test was a common occurrence and the Chinese government tried to crack down on the cheating. However, the students and their parents were outraged, leading to riots and chants of “We want fairness. There is no fairness if you do not let us cheat.” Here’s a LINK to an article.
It reminds me of an event in China from 2013, where the Chinese high-school aged children must take a rigorous standardized test for college and career placement. Cheating on the test was a common occurrence and the Chinese government tried to crack down on the cheating. However, the students and their parents were outraged, leading to riots and chants of “We want fairness. There is no fairness if you do not let us cheat.” Here’s a LINK to an article.
This is the culture these businesses operate in. We think that even if the Chinese government implements protections for the U.S. businesses, they will never be completely safe.
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Switching gears, economic data released over the last month leaned to the downside, continuing the trend of poor manufacturing and industrial data, but decent on the consumer side.
A month ago, many economists believed manufacturing was turning a corner and should be heading higher. However, that hasn’t been the case. News out this morning shows manufacturing continuing to decline.
A month ago, many economists believed manufacturing was turning a corner and should be heading higher. However, that hasn’t been the case. News out this morning shows manufacturing continuing to decline.
Industrial production was down sharply:
And productivity also turned lower:
However, the consumer side still looks good. Consumer spending remains very strong, wages are up, and employment has been solid. Here’s a look at retail sales:
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Where does the market go from here? Our outlook remains unchanged from last month where we were cautious, but stocks turned in a terrific performance. While we currently see no red flags that often precede a large decline, we think stocks are on the overbought (or expensive) side from a short term perspective. We would hesitate to put new money in the broader market here and prefer to find individual undervalued names.
As always, unpredictable events like comments from government officials on the trade war or from the Fed have the ability to push the market either way, so some caution is warranted.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
As always, unpredictable events like comments from government officials on the trade war or from the Fed have the ability to push the market either way, so some caution is warranted.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
