Rate cut, Impeachment and a Rotation to Value
September was another positive, yet volatile month for stocks. Equities closed out the month 2% higher thanks to a strong first half but did drift down during the second half of September. Bonds, in true inverse fashion, ended the month lower, after first rolling over ahead of the Fed’s September meeting then drifting higher for the second half of the month after the rate announcement. On a year over year basis, however, the S&P is only slightly positive.
Unlike the U.S.-China trade tensions as the main driver of market sentiment in August (which took a back seat last month) most of the monthly focus was on the Federal Reserve’s meeting, where they cut the Fed Funds rates by another quarter of a percent, as expected. By and large this decision was based on slowing global growth, trade tensions, and low inflation. The Fed also stated that it would continue to be data dependent in adjusting its rate policy in the months ahead– something market participants are used to hearing. The question remains whether the Fed sees a slowing U.S. economy as a reason to cut rates, or whether the rate cut was more due to an observed slowdown around the world which has not yet seeped too heavily into the U.S. market. A strong labor market, low unemployment and tempered inflation implies that the U.S. economy is still strong, at least on a relative basis.
During the middle of the month we noticed a dramatic change in a long-term trend that has been intact for the better part of the current economic expansion, namely the overwhelming interest to own growth and momentum from the investment community. However, there were several trading days when growth and momentum we sold off dramatically, and value shot higher. Such a rapid shift in interest in the value style, and away from growth, warrants attention. A few days does not make a trend, but we’ll continue to monitor this and, if deemed appropriate and durable enough, may ultimately begin to allocate additional resources into the value space. We’ve been overweight in large cap growth for most of this year, which has enabled us to keep pace with the broad market even though we started the year with a defensive position in cash after the end of last year’s 19% skid in the stock market. We will need to see a sustained interest in value over growth to pare down our growth exposure, which has worked so well for so long.
The month came to an end with an impeachment inquiry regarding President Trump’s conversation with the leader of the Ukraine. That the market did not sell off hard from this news wire, to us, suggests the market wants to go higher. While we still have not made new all-time highs from the most recent July 26th high, we continue to move in that direction, and for the entire month of September the S&P stayed comfortably above the prior month’s resistance level of 2,940, or 2% lower than where we are now.
As mentioned in prior Market Pulse blog posts, we expect on-going volatility while the market digests these uncertainties and, whether notable weakness around the world will drag down the relative productivity of the U.S. economy. For now, we are encouraged that quality U.S. companies and our U.S. Treasury bonds will remain attractive to market participants outside of the U.S., which should serve as a base for continued gains in the months ahead.
Should you have any questions or want to discuss your portfolio in greater detail, feel free to contact our office and set up a time to talk or meet.
Because this information on this blog are based on my personal opinions and experience, it should not be considered professional financial investment advice. No financial decisions should be made based off this article without consulting with your financial advisor first.
