What Did We See?

• The US equity markets rallied with most of the rest of the world in October.
• Recession concerns have now morphed into a “slowdown watch”.
• The ongoing trade war has started to possibly cool as a minor agreement was announced.
• We are now through the seasonally rough period for global equities.
• The safe haven of bonds saw positive results in the US in spite of the rallying equity markets.

Where Do We Stand?

• While global economies continue to slow or contract, the US equity market continues to make new highs.
• The Federal Reserve has pulled back from further easing but with potential issues on the horizon that could change.
• We continue to monitor the incoming data very closely but are aware that the markets seem to be in melt-up mode.
• De-risking of our client portfolios has occurred and we will take additional defensive measures as conditions warrant.
• We continue to rebalance your accounts accordingly.

Waiting for Volatility

The reality is that as we sit and wait for this higher volatility, the markets have been rather sanguine in the face of several political and geo-political landmines. This does not necessarily mean that the higher volatility won’t come. However, it does allow markets the opportunity to “melt-up” as sometimes can happen in the face of much pressure. So while the late cycle divergences we have talked about in the past continue to mount and the cross-currents leave us conflicted, one must not completely miss opportunities in these types of markets. Remember, markets do not follow a script. It is important to be very careful in the decision to being “all-in” or “all-out”. Either side of that stance can hurt you. So, while the markets continue to move higher, we are happy to take what is given to us. However, at some point we will likely look to get more defensive as the euphoria will likely subside eventually. In the meantime we need to be hyper focused on the market signals as they come to us.

The Signals and the Noise

While the fact remains that we are very late in the economic cycle, the markets told us something over the month of October. By reaching, breaching and remaining above all time highs, we may be at another euphoria phase of the market, regardless of what the data is saying. October brought with it the announcement of a small breakthrough in the ongoing impasse between the US and China. Financial markets welcomed this announcement as if the trade war was over. Nothing could be farther from the truth. To wit, the first phase of the trade deal was simply a promise from China to buy US agricultural products, open up their financial markets and show more transparency regarding their currency moves. While the “agreement” is certainly a step in the right direction after months of escalation, a “bigly” trade deal this does not make. China and the US are still skeptical of each other and remain competitors for supremacy on the global stage. Furthermore, President Trump could very easily begin to attack China as the November election looms near. While the markets reacted as if the completion of a minor phase of a trade deal was going to clear up all the economic woes around the globe, this analyst (and the data) beg to differ.

Losing Momentum

The US economy continues to lose momentum. An oft-cited index on the health of the US manufacturing sector, the purchasing manager’s index (PMI), has collapsed since August of 2018. While the index did move up slightly from September’s reading it still remains well below 50, which signifies a shrinking of the manufacturing economy. Even more concerning is that this weakness is seemingly bleeding into the consumer economy. Over the past year or so market bulls have continually pointed to the health of the US consumer as the vehicle of our economy that will save the stock market, and the economy overall. Consumer confidence slipped a bit in October while the pace of job growth has slowed as well. The consumer is a very fickle being and consumption can change on a dime. On the corporate level, while most earnings reports thus far have beat their estimates, managers remain skeptical of the health of the economy. US companies have continued to lower their expectations for next years earnings, often citing the trade war as an excuse. This is also likely weighing on these manager’s capital expenditure budgets as the uncertainty continues. The point is, all of these things are interrelated and most point to an economic slowdown. Our job is to try and determine how deep of a slowdown it may be.

Cross Currents

An alternative reality, which may hold more water now, is that we are going to get out of this unscathed. In this alternative realty, the Federal Reserve will step in at the right time to cut interest rates to zero (or below!) and pump enough excess liquidity into the economy to save it. Cooler heads will prevail in the trade spat and a significant and real agreement will take place. The US election cycle will be relatively subdued and the impeachment process dies a slow death. The seasonally better period for the stock market of November through April holds true and markets continue to rally. These events ocurring will put corporate managers in a much better position. They will be able to focus on the future and begin to invest for growth one or two years down the road. Their increased spending on capital expenditures revives the US consumer and it’s “off to the races” for our economy. I think the market is trading a bit too close to this “alternative reality” right now. However, even a few of these things happening may be positive enough for us to have a much smaller slowdown or recession than the bears would have you believe. The risk of a true melt up in the face of several or all of these developments is now something we need to be paying time to.

Where do we stand at Shorepine Wealth Management?

I continue to believe we will have an economy that is slowing, not collapsing, as my “base case”. We are now at the point in this recent mini-easing cycle where the Fed has pulled back from any further interest rate cuts. In some magical world they believe that the three small interest rate cuts this year will be enough to propel the US economy back to above 2% GDP growth and keep it there for a year or more. There is a lot of potential problems that could occur between now and the end of 2020. Especially in an election year. The Eurozone is probably in a recession already. The UK has the potential to slip into one, depending on how Brexit moves along. And most importantly, the growth engine of the world, China, is certainly slowing. Amid this backdrop we continue to advocate the somewhat de-risked positions we have built into our client portfolios. Cash levels are slightly elevated and recent changes to the portfolios from an investment perspective have been made with an eye towards more defensive holdings that can cushion returns should the economic environment continue to deteriorate. As always, our asset allocation strategies remain the best protection from adverse market conditions while allowing our clients the benefit of not trying to time the markets.

If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.

We appreciate your being a part of the Shorepine Wealth Management family and wish you all the best!

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