The attitude of investors towards equities was buoyed last month by optimism that a China U.S. trade deal would get done, belief that the rate of change in global economic activity had bottomed and news that the Federal Reserve was growing its balance sheet again. Whether one calls it QE or not, in joining the Bank of Japan and the ECB, the graph on the below left shows the clear reversal from the balance sheet tightening of late last year. In fact the dashed line of forward estimates on the right side of the graph shows this latest central bank party is just getting started. As a result, after having sold equities to buy money market and bond funds during the past couple of years (please see the graph on the below right), FOMO (‘fear of missing out’) catalyzed investors to start chasing stocks. This renewed buying drove the strong November for stocks, one that included 11 fresh all-time highs for the S&P 500.
October 2019 marked the 2nd consecutive month that value stocks beat growth stocks yet the broader FANG index, largely not representative of value, was the key driver of the strong performance in U.S. equity indices, gaining more than 6%. Hence, while a growing group of traders push the reflation story that sees large fiscal stimulus reaccelerating global growth and boosting the relative performance of the value factor and non-US equities, it’s largely the degree of tape action and the anticipation of this forward change in fundamentals that to date supports this pitch.
While our monthly commentaries typically recap what happened last month with a snapshot on our outlook, given that the market’s current noise level is louder than a Guns ‘n’ Roses concert, this month we’re going to reverse that formula.
This August earned another gold star at upsetting an investor’s most popular month for family holidays. Four years ago, our family was in the south of France when China decided to revalue its currency lower. Equities promptly fell 11% in a week. While by now, almost 3 years into Trump’s term, investors have become accustomed to an unfortunate and growing ‘gloves off’ way of conduct, it was unsettling to read, this time while we were in the UK, NY Fed President Dudley’s suggestion that the FOMC shouldn’t cut rates just to spite Trump. While Dudley’s quickly retracted comment didn’t impact markets, it was symptomatic of how chaotic the macro ecosystem has become as traditionalists fight to stop the attempted single-handed rebalancing of world order.