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As we move into the last month of the year, we leave a month filled with many interesting directional changes. Value stocks beat growth stocks for the second month in a row, high yield bond spreads widen for the first real time since 2016, the House changes colors, the US Dollar pauses its yearlong strengthening against major currencies, the Fed changes its rhetoric on monetary policy tightening, the emerging markets index went from worst to first against all other major indices, and Pence becomes the bad cop in this Good Cop / Bad Cop routine with China setting up an interesting dinner tomorrow (12/1/2018). I won’t run details on all of the different shifts, however it is worthy of noting that many of these shifts are market-friendly and our view that the next 12 months will support an upward moving global stock market has only strengthened.
Assuming markets remain steady for the rest of today (11/30/2018) the S&P 500 will end November up roughly +1.40%, the international markets (measured by the MSCI ACWI ex US Index) will end up +0.61% and the bond market (measured by the BBgBarc US Agg Bond index) will end up roughly 0.50%. Emerging markets will end the month up approx. +4.5%, responding well to the flattening US Dollar.
For the year this puts a 60/40 Global Stock/Bond portfolio at around -2.5%, with both the stock and bond side contributing to the losses. This does not equate to a year of positive investor sentiment and that is currently what we are seeing. Sentiment is waning amidst strong U.S. market fundamentals in earnings, revenue and profit margins, and amidst continued strength and expansion in our U.S. economy.
One of the most anticipated and watched shifts this last month was, of course, the mid-term elections. I’ve written in the past on how markets typically respond post midterms dating back to WWII. I will also say that one of the reasons I believe this is true is because markets have had two years of a president (many times a new one) – understanding what their agenda is and how they can push it forward – and then it has clarity on what the next two years will look like on Capitol Hill, allowing there to be more certainty in the markets. I also believe markets tend to like gridlock, as it keeps accountability on spending and massive reforms that can reprice markets quickly. Additionally and at no surprise to you, President Trump has officially entered his 2020 election campaign. I’ve said this to many of my clients already, but I do not believe that the president can run his 2020 campaign on the back of Tax Reform 1.0 results. Because of the gridlock it is highly unlikely that the POTUS gets his healthcare reform done or his Tax Reform 2.0 done. This leaves very few things that the President can focus on, including immigration, infrastructure, and trade. The good news is even this gridlocked Congress can agree on two of those (I’ll let you guess which one is still partisan). If President Trump ran his 2016 campaign on being a deal-maker, and he did, he’d better start making some deals. The most promising ones are with China and trade. I think there is more pressure for him to move forward with his negotiating tactics and come to some conclusions. The market, in my opinion, will absolutely respond well to any such deals. Our first real test from here is the G20 Summit and the dinner between Trump and Jingping on Saturday (December 1st). If they come out of that with any optimism on both sides, it could be the start to some long overdue deal making. On the other hand if the result is more tariffs and more friction between the two largest economies in the world we may need to tighten our straps and get ready for more volatility.
Concerning the Federal Reserve I’ll keep my comments brief. There will be a rate hike in December as expected and I am hopeful that Jerome Powell’s rhetoric in the ensuing press conference will be dovish and cautious. This would keep the markets responding well to his latest comments at the Economic Club in New York this week.
Probably my most anticipated playout for the next 12 months will be what the US Dollar does in relations to all the other major indices. There is a chance that as the Fed becomes slightly more dovish in their tightening, and if central banks around the world begin to pull back on some of their massive easing policies, we could see the dollar continue to stay flat or even weaken, allowing a tailwind to finally catch international stocks giving us 2017-like returns. The short-term technical indicators do not necessarily signal a weakening dollar is at hand, but we could easily see those indicators change given global policy shift. The Brexit mess may be the one major item that is still holding our largest developed economies at bay in seeing that shift in policy begin to take place.
The silver lining of the last two months is the correction we experienced shows very solid technical support; similar to the correction we experienced at the beginning of the year. Given that corrections of these magnitudes are a common and expected occurrence in the later stages of our economic cycle, we continue to look for opportunities with the volatility it brings.
Black Friday and Cyber Monday were extremely successful. Consumers are continuing to push this economy forward. So go out there, spend your hard-earned money on others and let’s get this Santa Claus Rally started!
A reminder, if you have missed any of our Month-In-Reviews you can find them archived on our website at https://www.aghwealth.com/p/month-in-review.
Thank you for your trust and confidence.
LPL Financial Advisor
Vice President, AGH Wealth Management
DISCLOSURES: Indices discussed above were analyzed on Morningstar Direct™. The indices included the S&P 500 Index, Russell 2000 Index, Russell 1000 Growth Index, Russell 1000 Value Index, MSCI ACWI Index, MSCI ACWI ex US Index, MSCI EM Index, and BBgBarc US Agg Bond Index. High Yield Spreads were measured by the ICE BofAML US High Yield Master II Options-Adjusted Spread index. The US Dollar Index was measured from the Trade Weighted U.S. Dollar Index: Major Currencies (DTWEXM) Index.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. All indicies are unmanaged and may not be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.