Stocks behaved like sinners in church last week. Anxious. Sweaty. And panic prone. Continuing their downward skid as investors responded negatively to disappointing economic data from China and the Eurozone, a slight increase in interest rates and rising global trade tensions. All being viewed against a backdrop of concerns over the White House. Which may or may not be in discord amid multiple political and legal fronts.
The S&P 500 fell -1.22 percent last week. An unfortunate follow-up to the prior week’s -4.6 percent debacle. With only two weeks left in 2018, the index lounges nervously in negative territory for the year, down -2.8 percent.
“There must certainly be a vast fund of stupidity in human nature, else men would not be caught as they are, a thousand times over, by the same snare; and while they yet remember their past misfortunes, go on to court and encourage the causes to which they were owing, and which will again produce them.”
-Cato’s Letters, January 1721
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Since the dawn of civilization, mankind has on occasion caught a fever so rife with speculative euphoria so as to have become the period’s defining event. Nor has mankind ever become inoculated against such conditions.
Yet mankind remains a slow learner, at best.
In the Dutch Republic of the 1630s, such conditions were omnipotent. Simply screaming for an outburst of speculative mania. Amid a period of rising commercial optimism. The fading specter of war following the defeat of the Spanish Armada. And a booming Dutch textile trade. Seemingly a rising tide that would lift all boats. Continue reading
U.S. stocks rallied Wednesday. The most they’ve leapt in eight months. The dollar fell. Emerging-market assets surged. Responding like Pavlov’s dog to the dovish tone from Fed chairman Powell. One that fueled speculation that the central bank is closer than thought to pausing rate hikes.
Stocks that had fallen the most during the six-week slump led the gains. Aggressively responding to Powell’s comments that rates are “just below” a neutral-policy range. Potentially removing one of the markets biggest drags.
Powell added that the economic outlook remains “solid.” Which underscored expectations for a December rate hike. But he added that the effects of higher rates take time to show up in data. Which led investors to surmise that the Fed is likely to reduce the number of hikes, if not outright pause them, next year.
Remember: the last midterm election after which the market was lower 12 months later occurred on November 5, 1946.
Ultimately, Tuesday’s election followed the most probably route (for a change). With the GOP losing the House, making gains in the Senate, and maintaining a slim edge in Gubernatorial offices as Democrats managed a small net gain.
The most interesting aspect of the night? The Democratic conquest of the House. And it’s worth a closer look. As we believe the GOP House defeat had three primary causes.
First, the unique aspects of the 2018 electoral landscape that saw Republicans had to defend 41 open House seats. Of which eight were in districts carried by Secretary Clinton in 2016. Seven went to Democrats. Another 10 were suburban districts where Trump won only by single digits in 2016. Eight of those went Democratic. In at least three districts, GOP incumbents who had declined to identify with Trump — and Mike Coffman of Colorado, Barbara Comstock of Virginia, and Carlos Curbelo of Florida — were sent to defeat.
Rough month for global equity indices. Yet, we remain above the March lows. At which time the S&P 500 fell to 2,588. three percent beneath today’s level. For now, the primary uptrend remains higher. Though pragmatic market observers must recognize that the trendline could be in jeopardy should this month end with lower lows.
This places investors in a waiting game. As we believe the current bout of volatility to be like the many others incurred throughout this bull market. Providing, in the end, to be a healthy, “Scare-all-the-weak-hands” correction. Separating the wheat from the chaff. So long as indices reverse course — then the current fireworks simply set the stage for the next run higher. Just when such a move is least expected.
Of course, that just happens to be how Mr. Market operates. One minute? Your best friend. The next? A stone-cold killer. Continue reading
WARNING: tomorrow’s election outcome will determine the very future of our Democracy.
Or not. In fact, you can add the above to all of the other ridiculous and exasperating nostrums being cast about of late.
Wednesday morning? I’ll miss the political attack ads. The venomous vitriol. The half-true allusions. The far-flung aspersions. And the embarrassing quantities of negativity we are forced to endure in support of what should be one of our most joyous annual occasions. The day on which we exercise our rights as free, liberty-loving members of this greatest constitutional republic on earth.
Most people tolerate these caustic incursions into their lives in the same way they contend with hemorrhoids. Largely ignoring them. Biting one’s lip when the discomfort gets too high. And waiting for that blessed moment when these painful annoyances dissipate into memory.
Following the previous week’s four percent decline, and the ten percent overall correction, the S&P 500 managed to climb 2.47 percent this week. Shaving some of the October losses. And lending an air of optimism to a pervasively ominous sentiment.
As of last Wednesday, more than 75 percent of stocks in the S&P 500 were 10 percent or more below their highs of the past year. Marking an official correction. The second of the year following February’s -10.02 percent decline. Such circumstances whereby 75 percent of index stocks are in correction has occurred five times since the 2009 bull market began. Three of which quickly formed bottoms. The other two saw further selling in the near term. Ultimately, however, they recorded solid gains over the following two, three and 12 months.
Interestingly, S&P 500 returns went temporarily negative for the year. This has happened after at least 100 days in positive territory only five other times since 1929. In all cases, the benchmark index was up solidly three and six months later. With the best result being an 11 percent gain in three months following the October 19, 1987, Black Monday crash.
For investors the world over, the last week has been anxiety inducing. Gripped, as we’ve been, by a cocktail of fear-inducing biological responses comprehended by few.
First, a contextual digression.
Consider February’s 10.02 percent correction. The week before that occurred, we saw $25 billion in new cash flow into stock funds. The sixth-largest amount on record. Largely a consequence of Main Street investors finally pouring back into equities after sitting on the sidelines for most of this historic nine-year bull.
The number of individual investors claiming to be “bullish” jumped to 60 percent. The highest reading in over seven years, according to the American Association of Individual Investors. Continue reading