The U.S. stock market, this last quarter, and during most of the summer, felt like maneuvering a container ship during a volatile hurricane. It doesn’t matter what was in the containers, or your portfolio, as large waves were hitting on all sides with some glimmers of sunlight and calm. The daily news that pops up every minute, it seems, on our mobile devices or on TV, continues to move fragile markets up and down, as waves hit from all directions. Whether it’s the trade war, what the Fed might be thinking, bond yields, and now, as if, we didn’t need more controversy, lets introduce impeachment hearings. We won’t go into the details of the accusations, but the House Democrats are initiating hearings based on a whistleblower complaint and the famous call with President Z. from the Ukraine. For those people who were not born before the Watergate hearings, you can now say you were there for the “was it a quid pro quo” hearings. These investigations will weigh slightly on the market, but much less than people think.
It is more likely the House Dems get an impeachment decision, if the evidence is there, and the Senate Republicans vote in favor of the President. So, the President will likely survive the impeachment process but whether that weakens or strengthens his base will be a key point. We think that the “market” feeling towards VP Biden, is “we can live with his policies”, as things went well during the Obama/Biden era, as they helped the economy to recover, even if it was slow, and they jump-started a longer term bull market that we have been enjoying since March of 2009. Its pretty well-publicized how the market looks at the rest of the Democratic leaders, who are not Wall Street-friendly. In recent days, there has been a lot of talk about Warren, as certain circumstances have occurred recently, such as, Sanders’ heart issues, the Trump impeachment hearings, and the fallout from "Ukrainegate" for Biden. This could make Warren a key factor in the elections, but she would need to shift moderates and independents towards her. The market is taking a second-look at her, and the consensus is a Warren win might initially place pressure on the market, but with the right balance in Congress it could tamper some of the more extreme policies that Wall Street and corporations fear. Our comments are never political, but we always view things as seen by the market. The market does not really care about impeachment, as the trade war continues to be the most important factor that could push us closer to a recession. But if we get a "mini-deal" with China, then you will see politics get more of a focus as the market will consider whether the daily chaos of Trump outweighs the risk of a new President.
Our economy continues to fight through bad retail news, low manufacturing numbers (worst PMI in 10 years: 41.9 on 10/1/19), and the trade battle with China. But as soon as the market gets a hint of an upcoming rate cut or a little bit of positive news about the trade negotiations (CHART A), it reminds me of a dog getting excited whenever he hears his leash, knowing its time for a walk. So, this type of behavior can be expected for a while. At this point we must say that the rate cuts are more like holding a cocktail umbrella during a thunderstorm. They are not having the effect that was expected, but they are providing some of kind insurance protection for investors that temporarily seek the soothing of their recession fears. We would prefer that the Fed did not cut rates at every hint of a slight market pullback, as our interest rates have stabilized slightly, and the market is still chasing an all-time high, no matter what news keeps hitting us. I think the Fed is also under pressure so that they don’t seem as though they are reacting to the tweeting barrage, where our President, who appointed the Fed chair, is calling him a “bonehead”. If the Fed seemed like it was cutting rates because of the President’s outlandish requests for low or zero rates, it could weaken their posture.
The chart below highlights the large downturn, last week, as very weak PMI (manufacturing) numbers were released. As soon as, rumors came out about a couple of possible rate cuts, the market rebounded. This type of zig-zag response can be expected for the rest of the year. But the key point is that this economy and market remain strong even with this wild ride over the past two years and more importantly the longer-term bull market that began in March of 2009 (CHART AA). I think people tend to forget about this and focus only on 2008 and the short-term. Oh, wait a minute, that sounds like every market pundit on TV.
CHART A: S&P 500 (Last six trading days – daily returns)
Source: AETOLIA CAPITAL & KOYFIN
CHART AA: S&P 500 vs. EAFE (Europe & Japan) vs. Emerging Markets vs. Frontier Markets (Since 3/9/2009 – 10/8/2019)
Source: AETOLIA CAPITAL & KOYFIN
Trade will lead the way for market reactions, until it doesn’t anymore, if we see a deal. There are some media reports that both sides are trying to negotiate “mini-deals”, in order to keep the trade war from escalating globally into a major recessionary force. Nobody wins in a global trade war and Trump and Xi, know it. Plus, President Trump cannot afford to carry a weak economy into the 2020 election. Bloomberg recently reported that the U.S. was thinking about removing freeze or remove some of the recent tariffs to encourage the purchase of agricultural products, by China. Talks with China are currently in session, and that is very positive. So, to wrap this up, risk pressure on investors, will continue to arrive via trade negotiations. Now, if we happen to get a quick “mini-deal”, soon, and considering the political issues going on in both parties, the market will start to the weigh the options of who might win the Presidential election and which sectors might be affected. For example, Financials, Healthcare and the regulation of the large tech companies. This is when impeachment or the health of a candidate will play a more major role, but no doubt this will have to come post-china deal. Also, as the next earnings season comes upon us, it will be interesting to see if tariffs are a major issue on earnings and revenue for Q3 and specifically the future guidance.
If you have any questions or comments, please contact me.
Regards,
John Anagnos
Managing Principal
Chief Investment Officer
AETOLIA CAPITAL LLC
3828 Kennett Pike
Suite 212
Greenville, DE 19807
Office: 302-543-4446 Fax: 302-510-4166
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