The ESG Update, Vol. 8
4 Things You Need to Know About the Market Right Now.
Good morning! I hope your Halloween candy hangovers aren’t too bad and you’re ready to tackle November and the countdown to the critical midterm elections.
In light of information overload and the PTSD: Post Traumatic Stock Disorder that is starting to build, I hope to inject a little sanity into a pretty unpleasant time.
Why is the market making daily 300-point price swings? Is the smart money selling or buying? When will the worst be behind us? When will it be smart to buy into the opportunities? When will it ease up? Some expect jittery markets to remain at least until the public votes on November 6.
Below are four issues at the crux of the current sell-off including my take, which should be calming, and ending with some “Tech Talk” to get you inside my head and read the “tech tea leaves.” Let’s get started...
1. The good news.
The negative technical indicators are not worrying me like the headlines indicate they should be. While there has been serious technical damage done and we’ll need some time to climb out, I’m just not seeing the volume and negative energy that I should be, given the dire headlines and hand-wringing.
The Fed is not driving us off the road into Snake Canyon. It takes 18 fed fund increases before the damage of higher prices works into corporate profits. Fed Chairman Powell is simply restoring us to more normal yields — ones that reflect the strength of our underlying economy and the cost of borrowing. FINALLY, we will be able to see 3% + yields from your bonds and decent earnings in your money market. It may hurt right now, but this is good for you, the economy, and the market. It is never easy to take away the kool-aid, aka easy money, away from market.
It has been over a decade since we saw prolonged Fed Fund increases and quite frankly, the financial commentators need to brush up on their history. We are halfway through this process and market jitters are expected.
2. Is it time to invest more in China?
Senior writer for Barron’s, Reshma Kapadia, looked at China this week and writes:
“This Halloween, it’s not a Hollywood monster that’s bringing the fright to investors: it’s a whole cast of scary characters, including trade-tariff-tensions, tech disappointments, rising interest rates, and wild swings in China’s markets. Combined, they helped push the benchmark S&P 500 into the red for the year. Globally, stocks extended their month-long slide.
Until this week, the US. market has shaken off troubles abroad. But like the foreshadowing in a horror movie, there had been signs earlier that China could spook global markets. Chinese stocks have been on a steady decline for months, down 27% since their January high. China’s economy grew at 6.5% in third quarter, the slowest since 2009. There’s a trade war with the US. and regulatory, monetary, and economic challenges at home.
And like the intrepid heroes of a horror film, some investors are wondering if now may be the time to tiptoe in. But as any moviegoer knows, there’s usually at least one more scare before the path to safety is clear. The US may be just digesting these challenges but China has been wrestling with them for much of the year, to mixed effect. China’s efforts to clean up its shadow banking, meanwhile, has meant that consumers are spending less: auto sales in September fell nearly 12%.
That’s where the potential opportunities come into focus. So is it time to invest more in China? The answer is a resounding maybe.”
3. NYC and global investment.
Lets now move to NYC and Global Investment firm Guggenheim Partners as they warn investors to ignore a flattening yield-curve at their peril. They forecast the next recession in a piece titled “The Yield Curve Doesn’t Lie” by Team of Guggenheim, 10/30/18. Note the underlined “positives” amongst their thoughts — it’s curious to read their dire predictions in the midst of a lot of positive data...
Despite robust gross domestic product (GDP) growth this year, our Recession Probability Model and Recession Dashboard still suggest a recession is likely to begin in early 2020.
“Our view that the next recession will begin in early 2020 remains intact in the latest update of our Recession Dashboard and Recession Probability Model. Despite the robust third-quarter GDP print, the Recession Probability Model ticked down in the third quarter, with near-term risks subdued. Worries of a continued overheating of the labor market, and in turn a less accommodative monetary policy stance are growing.”
While there is little risk of downturn in the near term, more restrictive monetary policy will overtake an overheating economy.
“Because of this gradual policy tightening, the flattening trend in the yield curve remains right on track with the average of previous cycles 18 months before a recession, while economic activity, as measured by the Leading Economic Index (LEI), hours worked, and retail sales, remains robust, signaling little chance of a downturn beginning in the next few quarters as the economy continues to overheat.”
We examine why, despite prevailing sentiment to the contrary, the flattening yield curve remains a powerful indicator of coming recession. Investors ignore it at their peril.
“Using the yield curve as a recession signal is not something we invented— its predictive ability has been known and extensively studied for decades. Despite its strong track record, however, the signal from the recent flattening of the yield curve has been dismissed by many in the market, and by many policymakers at the Fed.”
4. Midterm Tech Talk and looking forward.
As we head to the polls on Nov. 6 to elect the next Congress and scores of state and local officials, the stakes are high for investors given America’s trade dispute with China, a ballooning federal deficit, and potential legislative initiatives that could reshape various sectors of the economy. Is the next move up...or down?
Technical analysis brings confidence on when to take action — to buy or sell. A month ago, the new highs came with low volume and it was clear that a lot of the Smart Money was quietly taking some profits off the table. Your portfolios show this reality: cash has been quietly building up...and new buys in stocks or bonds had been put on hold.
It is amazing what a difference a month makes. Mid-September saw euphoria and the markets making record-breaking highs. Today, hardly a part of the market has not been beaten up. It is a technical reality that when there is as much technical damage as we have seen, we will need to see a “W” bottom to form.
I’ll be working with each of you to see where we need to be buying — virtually every asset class has values that will position you for profits in the coming years! Bonds are now paying the higher dividends for your future retirement income and you name it — US, Global, Large Cap, Small Cap, and Emerging Markets — all have valuations and technical indicators will help us stage our buys.
I’d love to spread gloom and doom this Halloween week but quite frankly, what I see is a very normal “letting out some steam” as we progress through this economic cycle.
To learn more about ESG investing, please contact Julie Skye at firstname.lastname@example.org or (918) 408-7981.