Market defies odds during a traditionally volatile month

October is a dangerous month for investors in the equity markets. Nevertheless, despite all the headlines concerning the ongoing trade war, a hard Brexit landing, new military confrontations in Syria, negative interest rates, global recession concerns, earnings reports, a cooling job market and economy, disorderly politics in Hong Kong, a slowing Chinese economy, US stocks shrugged off these worries and continued to climb. Indeed, the market’s resilience is most impressive.

The broad market, as measured by the S&P 500, closed on Oct. 18 very close to its all-time high of 3,025.86. Stocks seesawed and ended the week up with the large cap weighted S&P 500 closing at 2,986.20 and the broader NASDAQ Composite closing at 8,089.54 for a weekly gain of .54% and .40% respectively. These indexes are up YTD 19.12% and 21.92% respectively. Gold prices remained strong closing at $1,490 per troy oz and the US 10 Year Note was virtually unchanged to yield 1.747.

A number of themes caught our eye this October, which we want to point out. First, the article from DataTrek, Nick Colas and Jessica Rabe suggest that we might be in the midst of the “Great Earnings Reset of 2019.” They observe that S&P 500 earnings are essentially stuck at zero and this is preventing markets from making new highs. For a sustainable rally, they postulate that we need a positive resolution to the US-China Trade War. 

On a bright note for those who follow contrarian indicators, the recent cover story in Barron’s on “Upside Down” Interest Rates i.e., the growing number of negatively yielding bonds around the globe. Media attention like this usually foretells the peak of the investment theme which leads us to think that interest rates may be on the verge of bottoming and starting an upward move. We also note that looking around the world, we sense there is a general move by the G7 to reflate using fiscal policy given that monetary policy has reached its limits to support the real economy. Additionally, better than expected earnings reports from JP Morgan and Citibank also indicated that the US economy might not be headed for recession.

Keep in mind, given such low rates, a slight upward move can create significant dislocations in not just fixed income markets, but real estate and other levered investments. Investors in hedge funds should take note. The US Dollar Index fell by 1.2% at the end of Oct. 18 - a significant drop. Looking at the charts, the dollar index peaked in 2017 and has hovered in that area since. A weakened dollar would be a boost to Emerging Markets Debt and US Cyclicals, which derive approximately 40% of their revenues from overseas.

Lastly, most disturbing was a report by the IMF that warned the global bond bubble has put the global financial system at risk as fixed income funds as vulnerable to liquidity shocks. This is primarily due to holdings of illiquid high yield investments, which cannot be liquidated to meet shareholder redemptions. The canary in the coal mine indicator is the problem involving the liquidation of the Neil Woodford funds in Europe. The report provided ample scares just in time for Halloween.

This creates opportunities for traders and active investors who can use ETFs to take advantage of real-time market volatility - both up and down!