“Good investors gather information, put that information into current and historical context, then make sound decisions.”
A bumpy August has evolved into a smooth September. On a net data basis, the 7% correction that ran its course in just five days, then ricocheted over a 3% range for the next three weeks, was followed by a three week 7% rally. If this sounds rather redundant and boring, it is. Trading ranges are like that. Still, the months of August and September have the deserved reputation of being the two worst performing months for U.S. major market stock indexes. And we have cruised through them relatively unscathed, just like last year. Hmm.
Domestic equity markets remain in a trading range, and very near the top of the range. They also remain very sensitive to U.S.-China trade talk news. But even more interesting is what news equity markets have shrugged off. Last weekend 5% of the world’s oil flow was interrupted by a drone/missile strike. Equity markets let that run like water off a duck’s back. Later in the week a major labor union strike was announced. Once again, no bother. A few years ago either of those incidents would have triggered a significant response in equity markets. Factor in the endless haranguing and accusations in our nation’s capitol and you would think the sky was falling. But it isn’t. Which must be driving the doomsayers nuts. How excellent…
Because the economic news is excellent and the data is still defeating the negative narrative. Existing home sales increased 1.3% in August, beating the consensus. This is a continuation of the upward trend that began in January. Housing starts increased 12.3% in August, well above the consensus. Mortgage rates have fallen roughly 100 basis points since November 2018, not even factoring in the Federal Reserves 25 basis point cut in short term rates last week. Housing data is like taking the pulse of the consumer. The consumer has to feel very comfortable about their jobs, their earnings, and their prospects before taking big steps in their homes.
More positive economic data follows. Industrial production increased 0.6% in August, easily beating the consensus of 0.2%. Mining output increased 1.4%. Utilities rose 0.6%. Manufacturing, which excludes mining/utilities, increased 0.5% in August. Production of high-tech equipment rose 0.8% in August. In fact, nearly every major category showed growth in August. Interestingly, those categories which did not increase are being parroted as harbingers of impending gloom. But for every negative call, there were nine positive calls. What does this say about the economy? In spite of the negative press, the economy, like the consumer, is on very firm ground.
Bond markets got a nice bump higher during the August correction. In fact, bond owners have been enjoying a very positive trend year-to-date. Early in September, bonds pulled back to the long-term trendline, correcting their over-bought condition in August. For the year, high yield bonds continue to lead the pack, but investment grade bonds, municipal bonds, and international bond indexes all have positive performances YTD.
We clearly remember the fourth quarter of 2018. Algo-trading, high-speed computer trading, robo-trading, by whatever name is still an active risk of owning equities. Accordingly, we have introduced utilities, real estate, and consumer staples securities to managed portfolios, all traditionally defensive sectors. We go into the fourth quarter mindful of the economic positives, yet armed with defensive alternatives that have performed well during the year. And finally, once again, we remind you to please filter the information that is being broadcast. Their agenda is not your agenda.
Edward D. Foy, Manager, SELECTOR® Money Management
© 2019 Edward D. Foy