A Smarter Way to Invest Market Summary
October saw indexes continue to push towards record high levels, a trend that continued into the first few days of November. The S&P 500 set a new all-time high on October 30th which was further eclipsed at the beginning of November. The NASDAQ Composite and Dow Jones Industrial Average also set their own new highs in the last couple of days as stocks remain in rally mode. Overall, the S&P 500 Large Cap (2.0%), S&P 400 Mid Cap (1.0%), and S&P 600 Small Cap (1.9%) indexes were all up for the month of October. The SPDR gold ETF GLD was up 2.6% in October but the Vanguard Long-Term Treasury ETF VGLT was down 1.3%, a mixed message from the “safe-haven” asset classes. The leading sectors were health care, technology, and financials whose ETFs were all up for the month (XLV – 5.1%, XLK – 3.9%, and XLF – 2.5% respectively). Energy was the biggest losing sector, with the XLE ETF posting a 2.1% loss for the month.
The major driving forces behind the record push in stocks was a combination of good earnings reports, positive trade developments, solid jobs data, and a rate cut from the Federal Reserve. On the earnings front, S&P 500 component companies have been reporting better than expected sales and earnings figures. Much of this may be attributable to lowered expectations, but 60% of this group beat expectations on sales and 80% beat expectations on earnings in the third quarter. While these percentages are an improvement from 55% and 75% respectively in the second quarter, it is important to point out that both sales and earnings growth rates for the group have slowed since the second quarter. Much of the negative earnings data has come from the energy and materials sectors where commodity prices have weighed.
The October jobs report was released last Friday, and despite the headwinds posed by striking General Motors workers, the increase of 128k jobs easily beat expectations of 75k. The unemployment rate increased slightly to 3.6%, but upward revisions to the August and September figures demonstrate continuing strength in the jobs market.
In international trade news, the US and China have reportedly made enough progress in their continuing negotiations that the two sides hope to sign an agreement as soon as this month somewhere in the US. The two sides have reportedly reached a “consensus on principles” on what is being called a “phase one” agreement. Trade advisor Peter Navarro has mentioned that three phases are needed in an agreement that would address all the issues that the US has with China’s trade practices. The important issue of intellectual property transfer would be addressed in phase two. December 15 presents a looming deadline when a new round of tariffs on Chinese electronics is set to kick in.
Amid all this optimism, the Federal Reserve announced on October 30th that it would cut interest rates for the third time this year. Chairman Powell indicated that barring a sharp and unexpected decline in the US economy, this would be the final cut for the year. Normally, rate cuts are implemented to jump-start a struggling economy. Lower interest rates make it less costly for businesses and individuals to borrow money that can be used to spend on growth-producing endeavors. However, as discussed above, the jobs market is strong, and companies are posting good earnings reports. So why the rate cuts? The Fed has pointed to business spending as their justification for the cuts, with the main culprit being uncertainty caused by trade policy. We have touched on this in the past, but businesses are hesitant to spend money on new factories, new product development, or supply chain enhancements when they aren’t confident that their financial projections will still hold true in 12 months.
It would seem that the economy has become increasingly bifurcated in 2019. While the consumer has typically represented a large portion of GDP in the US (around 70%), the overall economy still relies on business spending as well. The consumer seems to be doing well with a strong job market, high levels of savings, and good corporate earnings, but businesses are stagnant as a result of their hesitancy to invest. The direction of the US economy going forward depends on which of these two factions falls in line with the other’s view. Either the uncertainty surrounding global trade becomes less opaque and businesses join the consumer, begin spending again, and the economy heats back up, or the sentiment of consumers is dragged down by businesses and the strong portion of our economy begins to buy into the self-fulfilling prophecy of a looming recession. Only time will tell if the American consumer can continue to buoy the economy.
OUR MARKET SIGNALS
CIGNX (Economic Strength Indicator)
CIGNX is our indicator for determining the health of the United States economy and the chance of an upcoming recession. A recession is two consecutive quarters of negative GDP growth; thus, it is impossible to know with 100% certainty that we are in a recession until 6 months after it has started. CIGNX aims to circumvent this 6-month delay. CIGNX gives us a measure of the strength and trend of the U.S. economy on a scale of 0% to 100%. Anything above 50% is a positive trend; anything below is a negative trend. When the reading dips below 40%, a recession may be nearing and our models would be adjusted accordingly. It is used as an input for managing our Dynamic and 401(k) Allocations.
CIGNX’s current reading is 28.1%, which is a decrease of 2.7% from last month’s revised reading of 30.8%. This remains below the 40% level that we interpret as bearish for the economy and our dynamically managed portfolios have reduced levels of risk in response.
Alpha/Omega (Equity Market Indicators)
Alpha and Omega are a pair of equity market indicators managed by our partner firm Titan Capital Management. Alpha is a short-term indicator that tends to be more active, while Omega indicates longer-term trends and is less active. We use these models to provide input for our Hedge, Large, Mid and Small Cap models; as well as our Dynamic and 401(k) Allocations.
There were no changes in either Alpha or Omega this month. Both indicators remain negative and the models managed by Titan Capital continue to provide a hedge against market volatility.
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