Market Commentary 9 September 2019
9 September 2019
Ridin' the storm out, waitin' for the thaw out
On a full moon night in the Rocky Mountain winter
Riding The Storm Out
— REO Speedwagon
We are truly "Ridin' the storm out", only for us the storm refers to the uncertainty created by the trade wars.
On September 21 of 2018 the S&P 500 index hit a high of 2,940.91. Today, almost a year later, it closed at 2,978.43 for a gain of 37.52 points or 1.28%. Moreover, the month of September has averaged negative returns 55% of the time over the past 20 years. As you can see, it has been tough for investors to make serious progress over the prior year and we may have a tough time going forward in the near term. Of further note, the fourth quarter is seasonally the best quarter for the market. Even so, last year's fourth quarter saw a plunge of over 20%. Let's cross our fingers that we don't repeat it this year.
One ray of hope can be seen in the chart below. The boxes highlight sideways or consolidation action in the market before continuing on the previous trend. It is quite common to see down trends take 3 steps which I have highlighted in the chart with arrows. In the fourth quarter of 2018 the first step was a drop of almost 10% before a sideways consolidation step, then a third step down of another 10% or so before turning back up. In May of this year the market did the same thing; a step down of about 5%, a step sideways, then a third step down of about 5%. However, this last trip down changed the pattern. In late July the market took a step down of about 7%. It then went sideways for almost the entire month of August before breaking above the consolidation instead of taking another step down. As a result, it is only about 2% below all-time highs. Hopefully, this break to the upside is not a head fake but the beginning of a new uptrend.
The struggle over the past year is somewhat easy to discern. It is mostly due to the trade wars and the incertitude that goes along with tariffs. One example that I read about is the company that makes Go Pro cameras. They moved some of their production out of China to Vietnam due to the tariffs. Then Trump said in a discussion that Vietnam is worse than China and he may go after them next. How can a company make sound business decisions in this environment?
The companies reporting the best earnings growth the past year have mostly been in the technology sector. Within that group the leadership seemed too mostly be provided by the software and cyber security stocks. There is a chance that may have changed. Monday saw virtually all leading stocks get decimated while the worst performing sectors seemed to take the reins. Those sectors were Financials and Energy. While a few days does not make a long term trend, it is a development worth watching.
Another development that may help markets regain their footing is round 13 in the trade war. Chinese and U.S. negotiators are planning to meet in October. Although there have been 12 rounds of high-level talks between the U.S. and China, a key source in China expects a breakthrough in round 13.
Hu Xijin, the editor of the communist People's Daily's tabloid Global Times, said he expects "substantial progress" in talks set for early October. The apparently well connected Hu has been accurate in previous commentary on the trade war.
If the trade wars are settled before too much more damage is inflicted then we may avert recession and be back on the way up. Time will tell.