October finished out the historically "Most volatile 90 days of the market" this year with no real excitement shown and volatility was fairly mild during the full 90 days. While there seems to be plenty in the news to keep one's focus on so many different characteristics of markets, much of the potential volatility has not really materialized at this point. Remember last year the most volatile period did not follow it's historical pattern of occurring during August through October bit it did come into view in last year in October and December as the S&P 500 fell 14.7%. Though this occurred completely after the 90 cycle "officially" ended in September, it still stung investors deeply.
The S&P 500 index for the Full Month of October 2019
With the S&P Index being up 2% for the month of October this helped the "worst 90 days of volatility" during the average calendar year close with a total return of just less than 2% overall. During this 90 days of Aug - Oct, the S&P 500 Index was down just slightly more than 4% at its lowest and was never up more than about 2.25% at its peak. For the last several months (see the second chart below) the market, while it has been down as much 7%, it has been somewhat "range bound" and it is not uncommon for range bound markets to find it difficult to break out of these confines to the up side.
As you can see in the first chart below, the S&P never spent too much time above the 0% line during the most recent full three months so while the bias of the market was slightly to the downside, overall the market defied that downward bias and ended this period in positive territory.
Overall the general malaise within markets is driven by a host of realities. First reality is this; earnings of companies are not growing, plain and simple. Look at this chart just below and though all S&P 500 companies have not reported earnings yet for the 3rd Q, this chart shows the current trend(s) heading toward shrinkage of earnings. Earnings shrinkage is NEVER good and yet with earnings shrinking right now, prices of stocks have not started their shrinking. Earnings have to support prices and if they do not , prices will indeed fall at some point. (Also remember stocks fall much faster than they rise, MUCH FASTER.) Historically the thought has been "growth at a reasonable price" (GARP) and yet are we moving towards what was known as, "growth at any price, (GAAP)? GAAP is a great word to fit here because there is a gaap in prices of stocks if earnings are not there to support those stocks. Growth at any price creates bubbles...... which pop.
Reality number 2. This chart below, is really showing that for the third quarter of 2019, earnings are starting to slip downward, falling. There is a large difference in not growing and going downward. Below we see a chart for S&P listed companies which derive more than 50% of their earnings within the U.S. they have earnings falling the least. Then on the opposite side of this, S&P listed companies which derive more than 50% of their earnings outside of the U.S., they have earnings falling the most. The middle section, showing in blue, this is the combination of all of the S&P companies. The core message here is this. Companies with the majority of their earnings based in the U.S. are in the best shape but they too are seeing slippage down in earnings, though not by much. Companies with global earnings are being hit the hardest. Also, a sub interpretation CRA is making is that the "trade wars" the media has raged on about, is not the core reasons for the struggles of companies nor the reason for earnings slowing. The trade wars have only created ripples in the water, not waves but the media outlets have to make news splashes at times and in that they may forgo some objectivity.
Another reality of the long term is this, consumers do not have confidence. They have been losing confidence for a long time. Look at this chart, it is a 20 year look back. Confidence by consumers has been slowing overall for almost 20 years. It has had some peaks on the upside for sure during that time but overall, the slope is downward.
If stock prices followed consumer confidence, and it actually somewhat did during the first twelve years of this chart, think where stocks would be today. They would be lower for longer. At some point stock prices and consumer confidence will likely get a little more in sync with each other overall. They won't run completely parallel but there will be some type of unity or longer term correlation between them we think.
Truly the third reality we will point out is that the global slow down we have mentioned and pointed to before. The International Monetary Fund Director has very recently told the world to, "be prepared for more slowdown". Watch this here.
Additionally, from the U.S. Institute for Supply Management, these comments below from a whole host of different industries, all which the ISM reviews, these are comments about their respective businesses, industries and their outlook for business ahead.
- “Customer demand is down, and we are expecting a very soft fourth quarter, without much relief in sight for Q1. Suppliers report the continued rise in labor costs, which are ultimately reflected in the rising product costs.” (Computer & Electronic Products)
- “The chemical manufacturing industry is depressed; demand across many markets globally is down, and pricing is as a result.” (Chemical Products)
- “Automotive sales continue to decrease; however, trucks and SUVs are still providing decent revenue. Cautiously optimistic for the near term.” (Transportation Equipment)
- “Economy is showing slight signs of weakening. The same business headwinds on trade, tariffs, and currency uncertainty are making the environment challenging.” (Food, Beverage & Tobacco Products)
- “Been hearing from lots of my suppliers that their business is down and [they are] looking for more work in the metal processing [and] machining areas. We remain very busy.” (Fabricated Metal Products)
- “Production demand is softening; some [of it is] due to seasonality, [but] much [is] due to customer order rate declining and dealer inventory stabilizing.” (Machinery)
- “Business for thermoplastic resins is very strong, but margins continue to be under pressure due to tariffs and global economy uncertainty.” (Plastics & Rubber Products)
- “Trade cost pressures continue to be a headwind in our business.” (Paper Products)
- “Automotive related manufacturing is definitely slowing in the U.S. I think we are seeing the negative impacts of the tariff war with China and the unsigned [U.S.-Mexico-Canada Agreement] deal starting to hurt consumer confidence, especially on large purchases. Corporations are slowing orders/production accordingly." (Primary Metals)
- “Our business levels have softened over the last three to five months, in the U.S. market [and] globally. Germany and China are both experiencing similar slowdowns. We are in the industrial industry, and the outlook appears to remain soft into Q1 of 2020.” (Electrical Equipment, Appliances & Components
Furthermore, many businesses are finding it hard to obtain the types of qualified staff to help them deliver quality work to their customers. So, to try to offset this "hard to hire" situation, companies are beginning to raise compensation to attract staff. A very typical late stage economic cycle reaction. This raising of wages will bring about inflation and the initiation of that is softly and slowly beginning to occur.
The Longer Term View: Stocks or Bonds.
Are there any industries which CRA sees as able to not be caught in this quagmire of "slowing and slowing and slowing" of business across the globe and now slowly affecting the U.S.?
In short, yes. We have held our utility portfolio positions for the last 15 months. We have held our real estate position all year long. We still hold our precious metals stock portfolios. We continue holding our medical device portfolios as we have this year. We recently added energy stock portfolios, Canadian broad stock market portfolios, and a commodities portfolio. With what we have added very recently, there is a clear bent toward inflation returning. Yes, inflation. It will begin to slowly percolate higher. I guess you could say this is one area of the market that is not slowing, it is growing! With markets slowing and inflation starting to raise it's head, it will begin to get "dicey" out there as the saying goes. Not right away but in a slowly growing posture.
We feel we always need to know where we are and to do so we need to stay aware of where markets have been. We will look back at a full year. We think it is always great to maintain perspectives. The chart below reviews the S&P 500 index which shows us that the last 12+ months have not yielded stellar year (2018 & 2019) results for the S&P 500 but in terms of bonds, bonds have definitely led the way!
And stocks, for all the many risks they hold, have delivered, after accounting for inflation (this is call "real return"), just under 4% per year for the last 20 years. (SEE BELOW).
Below shows the S&P 500 Index and Long Term U.S. Government Bonds. Based on this view of these two completely different investments, some could change their mind and where/what they think is better.
Where to from here?
We do see some changing of the guard here among stocks. The stocks which have led markets the last two years (to somewhat marginal gains based on the risks that have presented themselves against stocks) are mostly giving up their steam and falling back. At some point most of this will turn and begin to be behind us but I don't think that is going to occur in the near term future.
Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC
Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
800 -767- 5364
All rights reserved
Mortgages- Just an FYI on Rates:
Mortgage rates have continued their drop month over month and in September they were basically flat. Rates are down almost a percentage point in the last year! Stay tuned for possible refinancing of your properties. This bond market has been interesting and is likely going to get a lot more interesting!
History and Heritage Matter
The old adage in the investment business is simply, "past performance does not equal future results". Everyone has heard this and people know it so much so that it almost gets brushed aside. Maybe we should take this much more seriously relative to our lives than we do.
Growing up I traveled the world. Literally. The day I was a year old, my family and I boarded a boat in Seattle and sailed to Japan. After being there a couple of years, we moved back to my birth place, Bangor, ME. Yes, I am a Maine-iac. Not too many years past and we moved to the South Pacific. Guam. So we lived the island life for a while and then moved to that mysterious place, Roswell, New Mexico. (No, I did not know Al Gore, he is MUCH older than I). Later I managed to live in far northeastern Canada, a place they call the "Goose". It was so remote, that the number of "snow-less days" are only 121 days per year. Dark and dreary? I was a kid, what did I care. Learned to snow ski there and also how to build snow forts which would have withstood a Zombie Apocalypse assault. From there we moved back to he U.S. where I have lived in different places for the duration of my life so far.
Why do I bring all this meandering of travel and living to our newsletter? I do this because history and heritage matter and because I am the proud son of a veteran. Yes, my father made a career out of serving all of us in the U.S. Military.
My father passed away more than 15 years ago but I still live under the benefits and the freedoms which he and all other service people have given, granted and graced us with in the U.S. Just because we have all that we have does not mean we always will. A great quote you may have heard is this;
Freedom is never more than one generation away from extinction. We didn't pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same.- Ronald Reagan
Even though I grew up in a military family, I never really thought about what my father did very much. Never had a clue. Then at age 30, standing on the parade grounds at Fort Sam Houston in San Antonio, TX, I began to get a glimpse. I was on the parade grounds at "Fort Sam", a retiring Colonel was coming to work for us at the time so I attended his retirement ceremony. While there it was announced that the six retiring officers had a collective 184 years of service to our nation. That really struck me! They spent 184 years doing something to benefit me and our nation and I had never spent one minute doing something for them at all. It kind of hurt, kind of felt selfish.
Later, as I sat in my hotel room, I realized my father had done the same as these service people. He had served 26.5 years in the military, serving the nation and I had never even once thanked him for that. Sitting there, I picked up the phone, called home and tried to express to Dad what I was just beginning to realize. What all those years traveling and living in all those places was really all about. It really was a hard thing to do for something so seemingly simple! Conveying appreciation to someone I knew so well. I think for me it was simply due to the fact that I had so overlooked him and his efforts for so long! I felt a bit guilty I suppose. After I stumbled through some words of appreciation on the phone, there was silence. I heard my Dad clear his throat and then he said to me, with a tremor in his voice, "Thank you son, no one has ever called me and said, ""Thank you for serving" and until now I really did not understand how important those words can be. Try if you will, to thank anyone you can who has served our country, my guess is none of us has heard it very often and it could mean a lot."
INFLATION? We really have not used this word in a LONG time. Inflation has been muted for so very long. But it seems now that inflation may be on the hunt for a new place to show itself. If we are correct, it will slowly begin to show itself in soft and subtle ways.