One month does not a trend make: On Football and Investments

By: Jason Blackwell, CFA, CAIA®, Chief Investment Strategist; Brian Katz, CFA, Chief Investment Officer; Richard Steinberg, CFA, Chief Market Strategist

A review of October’s investment returns may cause you to believe that all of our worries went away – except that they didn’t. The so-called “Phase One” of a US-China trade deal seems to be advancing but hasn’t been signed. Brexit was delayed but is still pending final resolution. The yield curve is now mostly reverted but remains shallow. It is analogous to the plight of a Miami Dolphins fan, whose team won for the first time after losing their first seven games, hoping that their losing streak might reverse.

That said, it was a good month in the markets across every major asset class. The S&P 500 was up a respectable 2.2% and, for the second month in a row, international equities outperformed their U.S. counterparts. Moreover, emerging markets rallied strongly. Fixed income returns were muted but positive as credit spreads narrowed and the direction of interest rates became clearer. You may recall that October began with one of the worst starts to the month on record, but that seems a distant memory.

• In early October, it was reported that the US and China had reached an agreement in principle that would halt the escalating tariffs between the two nations. The trade deal has been a source of volatility for markets, both here and abroad, for some time as uncertainty is putting pressure on corporate investment. Progress on a deal was a relief to investors. Cynics might argue that the US softened its position as the President faced political trouble from impeachment proceedings which began in earnest during the quarter. While this may have had some impact, it’s also likely that market participants have lowered their expectations to an extent that a “Phase One” deal that accomplishes some of the original objectives is “enough” for now.
• The UK averted yet another “hard Brexit” deadline at the end of October. In perhaps one of the more dramatic acts in British political history, Boris Johnson was forced to request an extension of the deadline from the European Union (EU) until January 31, 2020. This was something that he famously declared he’d rather be “dead in a ditch” than request. He immediately followed up his formal, unsigned request with a plea to EU leaders to deny the extension. The EU obliged on the first request and ignored the second. In the subsequent weeks, Johnson negotiated an altered deal that creates a customs and regulatory border between Northern Ireland and Great Britain and eliminates the so-called Irish Backstop. Parliament seems more receptive to the new deal, but both Leavers and Remainers asked for more time to consider its details (the latter likely just seeking any reason for delay). A UK general election has been scheduled for December, before the Brexit deal will be finalized, promising to keep uncertainty high for at least another couple of months.

The Federal Reserve (Fed) lowered the Fed Funds target rate by an additional 25 basis points to a range of 1.5% -1.75% on October 30th, its third cut since July. Many expect this to be the last rate cut of the year as Powell explained that the Fed “sees the current stance of monetary policy as likely to remain appropriate.” Growing evidence suggests that both the U.S. and global economies may be heading towards a soft landing limiting the need for additional stimulus. The Fed also outlined and implemented its plans to provide additional stability to overnight lending markets, which have experienced volatility over the last couple months, pushing rates above the Fed’s targets. The issue was technical (rather than fundamental) and we believe that the Fed’s interventions are sufficient to keep capital markets flowing.

It is tempting to overlook concerns from the previous two months after markets posted solid returns in October, not unlike the way a Dolphins fan might get overly excited.  Indeed, the bullish observer finds support in a 10-year market run that has generally shown little reason for worry and substantial increases in indexes. While there are hopes of a soft landing in the global economy and a potential easing of geopolitical tensions, we are not yet ready to call the end of volatility and continue to take a cautiously optimistic approach.