Goodbye October, and good riddance. October was so ugly and so rare, it didn’t even have back-to-back daily gains until the very end. The S&P closed down 7% in October. It was the worst monthly decline since 2011. The Tech-heavy NAS was down 9% for the month. It was that bad. But corrections are healthy and are supposed to be a reality check by instilling fear. It works. Every.Single.Time. Are the lows in? Good question. Of course we don’t know. But there are many signs that suggest a near-term low is in. A re-test is likely in order to confirm it. Bottom formation is a process. It generally isn’t fun.
Stocks started November in the green. In fact, the first day of November brought a 3rd consecutive 1% increase for the S&P 500. The 3-day streak has significance. It’s only happened 4 other times in the last 10 years. The last times the S&P 500 was up 1% on three consecutive days was at the Brexit vote in June of 2016, the corrective lows in February of 2016, the lows around the PIIGS crisis sell-off in 2011 and the early days of this Bull Market back in May of 2009. There’s no guarantee that a repeat is in place, but those were powerful buying opportunities when things were looking really, really dark.
Now we are embarking on the strongest period for stocks. The 4th Quarter is historically the best period, with December and November being the top months on the calendar. October certainly cleared the decks, and has many wondering whether this Bull Market is coming to an end. But corrections are part of the process, and every one has led to new highs for this current Bull. It’s been a powerful trend worth playing until it breaks. It hasn’t yet. What’s more, we are now within the best 9-month stretch of the Presidential cycle. The 4th Quarter of a midterm year through the 2nd Quarter of the pre-Presidential election year has been the best period for the S&P since 1929. Even if this correction is coming to an end, the volatility is not.
The biggest risks, which still remain, reside in trade tensions and interest rates. Stocks got a boost when word spread that talks were picking up again on a potential trade deal between the US and China. A meeting between the two Presidents has been confirmed later this month at the G20 summit in Argentina. It’s unrealistic to expect any deal before or immediately after the summit. It’s believed that China is waiting to see the results of the midterm elections next week before they even consider negotiating. But the fact that dialogue has picked up is definitely a positive development. The other risk has been interest rates. They’ve risen. The Fed has been increasing rates as the economy has accelerated this year. Some believe they’ve gone too far, too fast. The process sent both bonds and stocks lower with a bit of a shockwave. It’s been recalibrating the higher price of money. Higher rates have made the Bond Market more compelling, but the question remains, how much higher do rates rise. Higher rates lead to lower bond prices. Volatile price action is the result and we don’t see that changing anytime soon.
Former Fed Chair Janet Yellen spoke at a conference in Washington this week. I was fortunate to be in attendance. Yellen said she is not seeing much to concern her about an economic downturn. 3.7% unemployment and low inflation are supportive of continued economic growth. The October job report, released this morning, confirms this. There are no signals from the Market that would cause her to halt the rate hikes. She made it clear that monetary policy is still accommodative. Higher interest rates are necessary to stabilize from overheating, in her opinion. She said the Fed is trying to take its foot off the accelerator, but it’s “tricky business.” It’s a process and needs to be forward looking. The Fed doesn’t want to chase. Letting things run and overheat would be more damaging ultimately. She made it clear she has great confidence in her successor, Jerome Powell.
Former Chair Yellen was asked if she had any thoughts on President Trump’s criticism of the Fed and his constant tweets. That got a laugh. She was careful in how she answered. Janet Yellen stated the President has the right to express his opinion. She did make it clear that she disagrees with his substance in claims however. She went on to say that economies in modern times perform the best when monetary policy is independent and non-political. The public needs confidence in a credible Fed. She was then asked if she was glad that she’s not there anymore. That got another laugh. She said, “I enjoyed the job. I was there during some tough times. I have all the confidence in the current team. I would be doing the same thing as Powell.” She reminded everyone that short rates were zero for 7 years.
Finally, Janet Yellen was asked what her forecast for 2019 was. She said slower growth. She anticipates over 3% this year and 2.5% next year. She believes unemployment falls further and inflation stays low. Yellen believes that 2% economic growth is sustainable over time, and that Fiscal policy provided a boost this year, mostly in the form of tax cuts. Ultimately, she is very worried about large debt in non-financial corporations. She is also worried about Medicare and Social Security longevity. They are both on unsustainable paths in her opinion. Costs need to be controlled and she sees a modest reform to Social Security at some point down the road.
It was an insightful and fascinating experience. The midterm elections next week will no doubt bring more volatile price action. But we see a path to higher levels in the coming weeks. We’re still balancing defense and offense. We are long-term investors who are mindful that there are many short-term risks. We also know this Bull Market won’t last forever.
Have a nice weekend. Remember to set your clocks back, for those that have non-digital timepieces.
We’ll be back, dark and early on Monday.