Market Pulse – October 2019

More Treats than Tricks

October, infamously known to be a rough month for stocks, advanced over 2% which brought the S&P 500 to a new all-time high on 10/30/19 before ending the month slightly lower. The bond market ended the month relatively unchanged.

We continued to experience daily volatility during the month of October, and anticipate ongoing market volatility as investors grapple with the prospect of slowing global growth, potential recession abroad, ongoing trade discussions between China and the U.S., earnings expectations of companies domiciled in the United States, and political uncertainty around the world.

Notably, we continue to observe a tug of war between various broad asset styles in the stock market. One day growth is up and value is down, and the next day the opposite. Similarly, we have observed small companies outperforming large companies one day and the very next day large companies outperforming smaller companies. This makes us think the market is trying to sort out where there is the greatest likelihood of future gains — whether value stocks (those companies that are cheap relative to the market) will finally attract investors, or if growth stocks (those companies whose earnings are growing faster than the market) will continue to dominate. Typically, smaller companies tend to have less sales overseas, potentially insulating them from ongoing trade wars or a slowdown in spending abroad, where large companies tend to have a significant amount of their sales outside of the U.S., and are more impacted to weakness abroad.

At the end of the day, the trend remains up, with value outperforming growth and small caps outperforming large caps during October. It is important to look beyond the day-to-day and recognize that the broad stock market continues to move higher. It is also  encouraging to see market breadth expanding as a broader number of companies in the U.S. are advance in price, compared to the dominant players, such as Apple, Amazon, Microsoft, Facebook, Netflix and Google, which have been the primary advancers in the overall market for some time.

On October 30^th, the Fed announced another widely expected rate cut of .25%.  The initial reaction was positive, and the Fed also indicated they will likely pause on any immediate future rate cuts. That the Fed decided to cut rates three times this year is both precautionary as well as proactive, attempting to insulate the economy from the impact of what appears to be a slowdown in growth.  It does take some time for rate cuts to have an impact on the economy, so pausing to observe the impact of the three rate cuts makes sense.

October was the start of the third quarter earnings season. While earnings have decelerated from a year ago, they remain slightly positive, with the exception of the energy sector. This indicates that the consumer is carrying their weight, since consumer spending accounts for 2/3 of the economic activity in the U.S.  We will continue to monitor forward earnings guidance to gauge whether we are experiencing an earnings recession, or simply a slow down in earnings from prior quarters.

Having observed heightened volatility in August, September and October, and anticipating ongoing heightened volatility moving forward, we have increased your equity allocation to low volatility and quality stocks, and reduced exposure of the market cap weighted total stock market index fund. This “de-risking” adjustment should insulate your portfolios from any meaningful future declines in the stock market while also maintaining target exposure for stocks to benefit from future gains.  We are very comfortable with this adjustment and are well positioned to both protect and continue to grow your investment assets in the months ahead.