November Monthly Market Update
Continuing its grind higher in terms of stock prices, Wall Street delivered another solid month for investors as a fully diversified equity portfolio gained about 2.4%. From the low watermark in early August, the near-three-month return for the S&P 500 has been nearly 8%. Among those stock groups leading the way include semiconductors (up 19%) and banks (up about 16%). I pick these in particular as they often act as a proxy for the future prospects of more economically-sensitive industries, which for a bull on stocks and the economy would be exactly those stocks you would want to see working well to validate the positive premise. I’m less sanguine on this. More on this below.
Corporate earnings reporting season off to an “okay” start
Though I believe most of the October strength had more to do with the structural trading environment discussed below, the first half of corporate earnings reporting season – which runs from October 15 until about November 10 – has been ‘better than feared’. It hasn’t been great but it wasn’t supposed to be…but it hasn’t been terrible either.
That said, two particular reports from this past Wednesday night caught my eye.
- The first is of course for Apple which surprised on the upside, not so much for its continued IPhone success but more for its progress in developing its other not-so-massive segments. Apple along with Microsoft are by far the biggest companies by market capitalization in the known universe at more than $1.1 trillion and have had a very large positive arithmetic effect on the S&P 500, as well as on market psychology. Though these stocks are very expensive by any metric, it’s hard not to see both continuing to act well.
- The second was Parker Hannifin (PH), of course nowhere near as well-known as Apple but regarded as a bellwether for industrial America. Its earnings were fine but its forward guidance was tepid at best, and as such its stock sold off significantly on Thursday. Some might remember that it was PH’s profit warning almost exactly a year ago which was a contributor to the beginning of Wall Street’s 20% decline in Q4’18.
Don’t fight the tape
In my very first Update from this perch at KLR Wealth last April, I noted the old Wall Street truism of ‘Don’t Fight the Fed’, meaning that if the Federal Reserve is continuing to maintain an easy monetary policy, one should maintain a very strong exposure to stocks. An equally oldie-but-goodie is ‘Don’t Fight the Tape’, meaning that as long as stocks are moving higher, the path of least resistance is higher still with the same implication for maintaining that solid equity exposure. It’s inarguable that the tape is strong. On the back of today’s jobs data (see below), early trading as November begins today is solidly to the upside. All else equal, the path of least resistance for stocks is indeed higher – for now.
It’s also inarguable that the most recent path of Federal Reserve policy is indeed quite accommodative. Wednesday’s 0.25% reduction in the benchmark Federal Funds rate is the 3rd such cut in 2019. Since it was very widely expected, ‘Don’t Fight the Fed’ no doubt played a part in the October stock rally.
But truisms are just that, truisms, meaning that they generally prove true, unless they don’t. It’s vitally important to keep them in the context of the broader market and economic environments…and I still have my misgivings on both fronts.
Breadth and trading volume figures…not too impressive
Within the markets, I am still not impressed by the internals, most particularly the breadth and trading volume figures I’ve noted before. On the broad New York Stock Exchange and NASDAQ market platforms approximately 6300 individual securities trade every day. At the all-time highs for the Dow Industrials and the S&P 500 hit earlier this week, I would expect that at the very least 500-600 of those would be making 52-week high prices. In fact, less than 300 did so. I would also expect that these highs would be riding on a swelling tide of enthusiasm as expressed in rising share volumes. Nope – it seems resolutely stuck in the 750-850 million shares-per-day range.
What this continues to tell me is that today’s markets are almost entirely the province of high-octane traders utilizing near-fully-automated ‘playbooks’ (as expressed in algorithms – hence the nickname ‘algos’) to maneuver their trading positions. We can be very confident that those two truisms are highly factored within those algo-based trading systems.
U.S. China trade update
Another ‘algo-favorite’ factor is the current trend of progress on the U.S. – China trade front. Very few days go by without some pronouncement of some form from the policymakers in Washington and Beijing. From the deepest level of pessimism (not coincidentally along with stock prices) reached in early August, these drumbeats have been steadily more positive, such we’re now to the point where Wall Street now believes a ‘trade truce’ at the very least – if not a significant trade deal - will be agreed to and signed in mid-November. Accordingly, this has also been a major factor in the strong rally in stocks since that early-August bottom.
There are plays within the playbooks, too. If macro-factors like trade and Fed policy hit the algos on the plus side, thereby leading potentially to better economic activity, then buying semiconductors and banks is a very standard trading response. Just as would be selling utility stocks, which of course was the worst performing group on Wall Street in October.
It’s not just visible in stocks. All tradable markets are available to algorithmic trading. Not surprisingly now, all markets are exhibiting a much higher degree of correlation that I would expect if this were a true re-acceleration of the big bull market.
Therefore it is this dominance of the ‘algos’ that gives me some pause in my enthusiasm for today’s stock market. Traders trade – up and down. Rightly or wrongly, they have no commitment to any investing time horizon beyond, literally, later today or tomorrow. For the past three months, the algos have been pressing stocks higher and higher. All the playbooks have been operating on buy signals. But this can – and will someday – change. Perhaps the re-budding of the U.S.-China trade relationship will turn sour. Or perhaps the Federal Reserve won’t be quite so cooperative in mid-December at their next official policy-change opportunity. With no other classes of investors currently part of the day-to-day mix, stocks may well fall, thereby blowing up both truisms, and therefore turning pre-programmed reasons to buy into reasons to sell.
Capital spending numbers-not so good
I also watch (warily) a number of economic indicators and data-points that are continually reported. Capital spending numbers are frankly awful. Yesterday’s industrial-oriented report from the Chicago Purchasing Managers was its lowest since mid-2015, perhaps validating Parker Hannifin’s reduced guidance. Just this morning came the very-high-profile monthly jobs data and the manufacturing-oriented National ISM. The first came in way above expectations, even allowing for the near-settled strike at General Motors. The second, not so much, with a level better than the month before but still below expectations. So far, the consumer spending numbers are just fine with only fractional signs of fraying within the internals of the credit card business. I especially watch the weekly jobless claims* report for early signs of deterioration for future jobs reports.
National savings rate over 8%
Please indulge me some real economic ‘geek-ness’ here. According to the U.S. Bureau of Economic Analysis, our national savings rate, i.e. the amount we save from current income, is once again over 8%, the kind of level only seen in past decades in the immediate aftermath of a serious recession…and never seen during sustainable economic expansions. This is co-incident with the highest level of Household Net Worth (as reported by the Federal Reserve and essentially represents the value of our homes plus investment portfolios) in history.
One would think that all this wealth would lead to more and more consumption and therefore a steady drop in our savings rates, as well of course in an accelerating economy…but it’s not happening that way. Q3’19 GDP growth was reported earlier this week at less than 2%, a big drop from earlier in the year. I can only surmise that the current level of optimism reflected in the consumer spending we do have is the proverbial ‘mile wide but inch deep’. Since consumer spending represents a full 70% of our domestic economic activity, any hit to consumer confidence can have further and perhaps significant negative economic consequences.
Of course there is also the ongoing political environment which, so far, has seemed to have had zero to little effect on economic activity and investment performance. So far, anyway.
Continue to cheer stocks “from underneath”
Accordingly, my ‘broken record’ is to continue to cheer stocks on ‘from underneath’, with a small underweight to stocks in client investment portfolios. So far, waiting for Wall Street to have the 20-25% ‘baby bear market’ that would accompany a baby recession has been somewhat akin to being Vladimir and Estragon in Beckett’s classic Waiting for Godot. And I’ll admit that the inarguable strength of today’s jobs report casts even more doubt on that potential eventuality. However, I continue to have the courage of my convictions, helped by the knowledge that we still have very solid equity exposures for our clients that have done very, very well indeed. (And I don’t think anybody will complain if my premise turns out to be wrong.)
The holiday season rapidly beckons. Please know we are here for you at all times. Your comments and questions are always welcome.
*Every Thursday morning at 8:30AM ET the U.S. Labor Department reports the aggregate level of first-time unemployment claims. Though any data related to jobs is notoriously known for being a ‘lagging’ economic indicator, this is the relative canary within those series. Claims have been tracking at the 200,000-205,000 level for many months but yesterday’s print showed a rise to 218,000. Any sustained rise up to or above the 225,000-230,000 level may well prove to be a negative early warning signal.
Published on: 11.01.19