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October Commentary

Financial Insights

Equity prices worldwide ended October mostly higher. The final figures showed only moderate gains but masked some impressive intra-month performance, particularly in the US. New all-time highs for isolated broad based domestic equity indexes began to appear late in the month as many benchmarks approached and, in several instances, exceeded their late July 2019 highs.  

Global equities were also net gainers for the month and mostly exceeded advances posted by US markets.  The UK’s FTSE All-Share index, however, was one of a few losers. Uncertainty about the future of Brexit persists after Parliament’s failure to implement or at least agree upon a coherent path forward after missing the October 31 deadline for EU withdrawal. 

A general election in the UK scheduled for mid-December could provide a meaningful Parliamentary majority for PM Johnson. Skepticism has grown, however, that Johnson intends to pursue a clean break from the EU. British voters will have their second opportunity to render a decision on Brexit in December.1

The October performance of representative broad-based global and domestic equity benchmark indexes is below.

The main event in the US credit markets last month was a widely expected ¼% short term interest rate cut by the Federal Reserve. With the Fed Funds rate now targeted at 1 ½%-1 ¾%, the Treasury yield curve has fully reverted to a normal, positive slope.  

In its statement announcing the cut, there was no suggestion that an additional reduction will be forthcoming at the Fed’s next meeting in December. Inflation, as measured by the Consumer Price Index, remains low at an annual rate of approximately 1.6% (not seasonally adjusted) through September’s report.2  

In our view, the data indicates no need for further rate reductions. Fed policy can now be characterized as neutral after a moderately restrictive stance through most of 2018-2019.  In other words, if inflation remains within the current range, there is no impetus for the Fed to lower or raise rates.  

The positive performance of the bond market so far this year indicates that a significant increase in the inflation rate is not expected in the immediate future. The US Treasury yield curve as of January 1, 2019 and November 6, 2019 is illustrated below. 

US economic news remains on balance positive. The October Employment Situation report contained not only a somewhat better than expected number of jobs created, but also upward revisions of both August and September jobs formation.  When the most recent report is augmented by the revisions, 223,000 new jobs were added in October, which also includes a reduction of roughly 40,000 positions lost as a result of the GM strike settled last week.3 It would be difficult to characterize the 2019 job market as other than robust.

Wage growth has continued to hover nominally above and below 3% annually. The year to year gain in October from 2018 was 3%, well above the inflation rate. Real wages (wage growth minus the inflation rate) for hourly workers have grown steadily for more than 2 years.4 

Third quarter corporate earnings continue to largely beat expectations. As of Friday, November 1, 71% of the S&P 500’s companies have reported earnings with 76% bettering projections. In addition, some 61% of reports contain revenue numbers bettering analysts’ forecasts.5 

Separately, the first reading of third quarter GDP showed an annual growth of 1.9%, below last year’s rate of expansion but significantly better than the 1.6% that had been expected. Strong consumer spending and government expenditures combined to overcome a decline in manufacturing activity, which has developed over the past several months.6

In Washington, DC, impeachment remains the predominant topic. After formalizing their ongoing inquiry with a floor vote, House Democrats are preparing to release previously secret testimony by several administration officials. Judging by their statements, Democrats in the House are nearly unified in their intent to impeach President Trump.  

There is no indication to date that the Senate will vote to convict and remove the President. A Senate resolution deploring the House Intelligence Committee’s conduct of the inquiry gathered 50 Republican sponsors. The process has very much devolved into a series of (unelected) officials from the National Security Administration, the CIA and the State Department disagreeing with and criticizing the President’s conduct of foreign policy with respect to Ukraine.  

Our reading of the Constitution confirms that the President has sole responsibility for and power to conduct foreign policy, which begs the question of why Executive Branch employees who disagree with Mr. Trump’s policies are being cited as evidence of “High Crimes and Misdemeanors.”

We discussed polls in a previous blog post and as more national results appear almost daily showing majority or near majority support for impeachment, it is important to remember that these same polls peg Republican support for the President at just over 90%. Unless the President loses the support of Republicans, removal from office is unlikely.

The New York Times examined several battleground state presidential preference polls last week and found that differences between those results and national polls are stark. The President currently trails both Joe Biden and Elizabeth Warren by double digits in many national polls. In key individual states, however, the results of these pairings are mixed and overall much closer.  In many matchups between the President and Democrat candidates, spreads in the state polls are less than the margins of error.7

Discounting potential oversampling of Democrats in national polls, these state polls portray a very close race, even as the President is handicapped by the House impeachment inquiry. In the Electoral College system, the candidate who wins enough individual states to amass a total of at least 270 electoral votes becomes President. National polls measure national sentiment, but it is the state election results that will determine the next US President.  

We can’t know the outcome of the current political conflict in Washington, but we can look at the performance of the equity and bond markets and conclude that investors appear unimpressed by efforts to remove the President from office.  

The recent strength of Value and Small Capitalization equities relative to Large Capitalization and Growth securities suggests that investors’ appetite for risk is growing, not diminishing. This, evidenced by new all-time highs in numerous broad benchmark indexes in the first trading sessions of November, suggests that optimism remains the prevalent sentiment in the equity markets.

Equities in 2019 have registered strong gains so far, despite slowing domestic and international economic growth rates as well as what can only be termed all-out war between Republicans and Democrats in the US. The unexpectedly strong performance in third quarter corporate earnings is providing a strong incentive for patient investors to remain invested. As we have seen this year and others, ignoring the noise surrounding the political process and the press’ handwringing over each bit of potentially negative news has provided strongly positive investment returns. 

1 “Boris Johnson Leads Westminster to a Waterloo Over Brexit,” www.wsj.com, October 27, 2019. 

“Consumer Price Index,” www.bls.gov, October 10, 2019.

“Employment Situation Survey,” www.bls.gov, November 1, 2019.

“U.S. Adds 128,000 Jobs in October, Beating Expectations,” www.wsj.com, November 1, 2019.

“Earnings Insight,” www.factset.com, November 1, 2019.

“US GDP rose a better-than-expected 1.9% in the third quarter as consumers continued to spend,” www.cnbc.com, October 30, 2019.

“One Year From Election, Trump Trails Biden but Leads Warren in Battlegrounds,” www.nytimes.com, November 4, 2019.

This content is developed from sources believed to be providing accurate information. The opinions expressed and material provided are for informational and/or educational purposes only and is not, in any way, to be considered investment advice nor a recommendation of any investment product. Advice may only be provided by DWM's advisory persons after entering into an advisory agreement and provided DWM with all requested background and account information.