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Monthly Market Commentary: October 2019 Thumbnail

Monthly Market Commentary: October 2019

Market Commentary

Trade Drama and Media Distractions, the Fed is still key

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

KEY POINTS:

  • We continue to draw investors’ attention to the impactful actions of the Federal Reserve on equity markets.
  • Investor sentiment may be low, but we believe economic data, Fed moves, and developments on the trade front offer positive outlook for equity markets.

EQUITY MARKET

Equity markets in September rebounded after a volatile August. The S&P 500 rose 1.7% while the Dow Jones Industrial Average and the NASDAQ Composite respectively gained 1.9% and 0.5%. Investor sentiment continues to remain very negative. The American Association of Individual Investors survey reported that investors showed the lowest level of bullishness in equities in three and a half years, with only 20.3% of investors expecting gains in the next 12 months versus a historic average of 38%. While US-China trade talks continue with no clear resolution and we now have the possibility of a presidential impeachment, equity markets still trade slightly below their all-time highs. This is due to investors choosing to focus on the Federal Reserve’s monetary policy which is far more relevant for investor returns in the long term. 

With the Fed cutting the target Fed funds rate by another quarter point and talk of providing more liquidity to money markets, investor sentiment especially amongst institutions continued to improve over the last few weeks. With much lower fixed income yields, especially in US Treasury market, investors found many high-quality US stocks providing dividend yields well above long-term US bonds lending support to equity markets.

FIXED INCOME

Finally, after many months of the yield curve flattening, we finally saw some steepening with yields on Treasury Bills declining while rising on longer dated US Treasuries. The economic data on balance continued to surprise to the upside, with strong retail sales and housing data while employment data came in slightly softer than expected. With the Federal Reserve’s monetary policy becoming slightly more accommodative and potentially much more so in the coming weeks, we would expect the yield curve steepening to continue. We continue to view the risks in long dated fixed income securities as elevated.

MARKET OUTLOOK

For many months we have continued to recommend investors focus on the actions of the Federal Reserve—not the financial media or US-China trade negotiations. The Federal Reserve’s monetary policy has for most of the year moved from being tight to accommodative, historically the Fed’s actions tend to determine asset prices, especially for equities. With interest rates moving lower and equity dividend yields for high quality stocks at or above bond yields, we believe equity markets offer an excellent risk reward trade off. We remain bullish on equity markets while continuing to avoid or sell fixed income securities in this economic environment. As we go to print, it would appear that some progress has been made on US-China trade rendering us even more bullish.

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.

SOURCES

Wells Fargo Advisors, Angela Shin and Jack Kraft, “Monthly Market Commentary,” October 2, 2019. AAII Investor Sentiment Survey, October 9, 2019.

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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.