October was a challenging month for global equities and bonds with many market segments declining in price. Broadly, commodity prices fell with precious metals and energy posting negative returns. However base metals rose 2.5% for the month.
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The third and final U.S. Presidential Debate was Wednesday and the general consensus is that Hillary Clinton was the winner (although the impact of later debates tends to be less than initial ones). The reaction in the markets was a virtual yawn and it appears that investors moved on. Any market movement in coming days will likely be reactions to other headlines including that U.S. jobless claims increased after spending several weeks at a four decade low or that the European Central Bank (ECB) is keeping its quantitative easing program and interest rates unchanged. While we have seen some predictability in the market this should not be confused with health or strength. We have observed a persistent pattern of fragility, including a U.S. market, as measured by the S&P 500, making lower highs and lower lows, that has become more apparent since this Summer. Interest rates, both policy and market, are near zero and in some cases negative, equity and bond market valuations are full or extended based on several common measures, and the policy cupboard is becoming increasingly bare. Our concern is that there is little that would be welcomed by the market in either candidate outcome, and given tenuous fundamentals and economic conditions, capital markets could react adversely to any unexpected bad news.
Global equities outperformed global bonds during the month of September with many of the more volatile markets within both asset classes delivering the highest returns. (Revised Nov. 1, 2016 for typographic error)
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Traditional media, blogs and social networks were lit up last night for the highly anticipated first Trump-Clinton presidential debate moderated by Lester Holt. The only thing certain is that nothing is certain. Depending on the particular axe a media outlet, writer, commenter or pundit has to grind, the perspective on who won is different. This is not high school debate club. No points are given so winners and losers are entirely a matter of opinion.
We are not going to offer our own capsule review and call a winner. To us that is not what is relevant to our decisionmaking process. What is relevant is how the markets reacted during and after the debate. We will not succumb to short-termism and try to game a quick surge in Mexico when Donald Trump takes a shot or play a rally in large US corporates that would benefit from a more conciliatory tax regime when Hillary Clinton gets hit on taxation. But, we do see signal in the noise. Maybe more so than in any election since Carter-Reagan, the differences are stark, and nation-states and markets are reacting to the prospects of each candidate assuming office.
A split electorate means this is anybody’s election. The market, showing some of that disturbing behavior that looks more like Vegas odds-making than price discovery, is trying to handicap an outcome and the implications. Our call for the next half a quarter is for heightened volatility as each candidate’s fortune rises and falls, followed by substantial directional moves when the results become known. WCM is focused on longer-term value and will take advantage of market disruptions from this volatility that create a gap between short-term price and that long-term value.
All eyes were watching yesterday as the Bank of Japan (BOJ) and the U.S. Federal Open Market Committee (FOMC) announced their current decisions regarding monetary policy. There has been increasing doubt regarding the true effectiveness of recent approaches, particularly open market bond purchases (so called “quantitative easing”), in terms of improving economic growth and spurring inflation. In an apparent acknowledgement of that, the BOJ announced that it would change its policy approach and focus on interest rates and the yield curve rather than the money supply. BOJ Governor Kuroda characterized the change as an enhancement to current policy but this can be seen as a significant shift and an acknowledgement that the recent policy of aggressive easing has not produced sustainable economic results. Japanese bank stocks rallied on the news and the yield on 10 year Japanese Government Bonds (JGBs) turned positive. The BOJ remains focused on achieving its 2 percent inflation target.
To little surprise (but frustration in some circles), the FOMC held steady on rates. The Federal Reserve is data dependent and had a weakening case for a rate hike based on recent metrics including retail sales and industrial production data. But, the Fed’s forward guidance indicated its belief that the case for an interest rate increase has strengthened based on indicators including household spending, consumer sentiment and labor market trends. Fed watchers believe that the central bank is setting the table for one hike in 2016, most likely in December.
As the market mantra says, “You can’t fight the Fed”. We will continue to pay attention to central bank policy in the US as well as Japan, Europe and the UK in recognition that, beyond the economic impact, policy moves markets. As market participants, we believe the time for this type of market manipulation has long passed, both from an investment perspective as well as in recognition that the economic benefits are fleeting. Ultimately, we are believers in the fundamental drivers of markets (e.g., earnings growth, valuation). These policies continue to overwhelm the fundamentals (is “risk on/risk off” the new paradigm?) and force active investment managers to disproportionately account for and weight top-down policy in an otherwise bottom-up process. It is time for the central bankers to step back and allow the markets to function on their own.
The world’s riskier areas of the capital markets posted moderate gains in August after July’s sharp rebound in the aftermath of Great Britain’s June referendum to leave the European Union, commonly known as “Brexit”.
Please click on the following link to read our August wrap-up:
Information, careful analysis and thoughtful action are central to our process for managing our clients’ portfolios. Think of this blog as a window into how we think and act every day. It may be an observation on the market, a meaningful data point, an explanation of a change we have made to one or more portfolios, a monthly or quarterly wrap-up, or a capsule of something we found particularly compelling from another source. Welcome and enjoy.