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Monthly Market Commentary: November 2019

Investors’ October Fears Not Realized 

Marco Fragnito, Managing Principal | Robert R. Fragnito, Chief Operating Officer | Print Version

KEY POINTS:

  • Historically markets perform worse in September than in month of October.
  • Recent moves to cut rates by the Fed signals a more responsive monetary policy.

EQUITY MARKET

Investors have historically feared the month of October as two memorable crashes have occurred during the month, the first in 1929 and then again 1987. The fact is, history shows that the worst month for markets is the month of September with an average loss of .62% while October has delivered an average positive return of .66%. This year the market avoided a sell-off and a crash only to deliver positive returns across the major market indexes which led to new all-time highs for both the S&P 500 and Nasdaq Composite.

There were numerous reasons for the advance: stronger than expected corporate earnings, the yield curve returning to normal upward slope, and most importantly, a much clearer picture of the Federal Reserve’s monetary policy going forward. In addition, investor sentiment was also lifted by the apparent progress on US-China trade negotiations and an extension to the Brexit timetable.

FIXED INCOME

The Federal Reserve as expected lowered the Fed fund target rate for a third time this year by .25%, bringing the rate to a 1.50% - 1.75% range. A target rate which approximately matches the rate of inflation as measured by the Fed’s preferred gauge of inflation, the PCE deflator, which stood at 1.7%. This continued a weakening trend in the inflation rate which saw it fall to its lowest level since 2016. While manufacturing activity continued to deteriorate in October, the consumer side of the economy remained strong, leading to a higher than expected reading on GDP growth of 1.9% versus expectations of 1.6% on an annualized basis.

The key event for fixed income markets was the FOMC (Federal Reserve Open Market Committee) meeting. At the meeting, the Fed governors voted for a cut in short-term interest rates and to resume the buying of short-term dated US Treasuries to provide liquidity to bank reserves at rate of $60 billion per month. Following the decision, Fed Chairman Jerome Powell emphasized “in no sense, is this QE (quantitative easing).” Whatever Powell wants to call it, this step was well received by financial markets.

Most importantly, Powell at his post-FOMC press conference outlined the future direction of monetary policy in what we found was in the clearest terms to date. Chairman Powell not only indicated a pause in monetary stimulus but also that they would have to see a “significant” uptick in inflation to hike rates. This is was what we at MCF and many others in financial markets wanted to hear, that the Fed would no longer act pre-emptively to slow the economy out of fear of higher inflation but would actually allow the economy to grow at a faster pace for a longer period.

MARKET OUTLOOK

In a global economy where corporations are competing aggressively to grow their market share, it has been our belief that inflationary expectations on the part of central bankers were much too high and difficult to achieve or create. Despite trade wars leading to tariffs, we have remained bullish on equity markets as the level of pessimism among investors has remained elevated and we continue to expect markets to move higher in the coming months. The Federal Reserve’s new stance on monetary policy and a desire on their part to let the economy grow in the future gives us confidence for sustained growth into the new year.

If you have any questions please contact us directly at 949.472.4579, and feel free to forward this report and our contact information to anyone who might be interested.

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DISCLAIMERS

The opinions expressed here reflect the judgement of the author(s) as of this date and are subject to change without notice. Information presented here is for informational purposes only and does not intend to make an offer, solicitation, or recommendation for the sale or purchase of any product, security, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here. The information being provided is strictly as a courtesy. 

SOurces

Wells Fargo Advisors, Jack Kraft and Angela Shin, “Monthly Market Commentary,” November 4, 2019. Investopedia: Andrew Beattie, “October: The Month of Market Crashes?” October 15, 2019. James Chen, “September Effect,” April 23, 2019. Bloomberg, Rich Miller, “QE, or Not QE? Impact of Fed Bond-Buying Will Depend on Treasury,” October 11, 2019. Moneychimp.com, “Monthly Market Returns – The January Effect, Etc.”