The Brave Report: Market Commentary for November 2019

Click here for .pdf version of this report: The Brave Report-November 2019

Rally mode. The month of October was very good for investors. Progress on the trade front, a Fed rate cut and in line earnings have pushed all the major indices to all-time highs. The underlying fundamentals and corporate data have all held up over the past year, even in the face of some major uncertainties and the fear of slowing global growth. As I have discussed in past reports, if we got some clarity around some of these uncertainties than the market should be able to rally higher and that is exactly what has happened over the past few weeks. With that said, we are far from out of the woods yet and we are still one tweet or negative development on the trade front away from all these gains being wiped out.  I expect progress in this area to continue as both sides can benefit from continued goodwill, especially as we enter an election year for Trump. The question that remains, is how much more room is there to run and will the alleviation of these uncertainties lead to improved corporate earnings and/or multiple expansion as we head to the end of the year.

Market Overview

All three major indices have rallied to all-time highs over the past month.  As is often the case in rally months, the NASDAQ was the big winner, gaining 6%. The S&P 500 and the Dow Industrials followed suit, gaining 3.3% and 2.9% respectively.  These gains are even a bit more impressive as all three indices were down around 2% in the first two trading days of the month, meaning the NASDAQ rallied almost 8% from the monthly lows. We will see if the markets can extend these gains as we enter what is historically a good time of the year for the markets.

On the rate side, we continued to see some stabilization across the entire complex.  To start the month, the rate on the 10-year treasury pulled back briefly to retest the low 1.50 range only to rebound and trade in the 1.70s for most of the month.  As expected, the Fed cut rates again last week but did indicate that future cuts would be data-dependent, signaling that their recent pattern of rate cuts may be on pause for now.  This should lead to a slight recovery in rates, especially considering inflation is well in check.  I do not expect any rate increases either and we are hopefully in a bit of a goldilocks situation with reduced uncertainty around what the Fed’s next move will be.

Trade Negotiations: The big positive progress over the past month came on the trade front with China. The two sides met in Washington early in the month and seem to have taken steps toward some sort of trade agreement.  At this point it is not a comprehensive agreement but more of a phased or watered-down agreement. I discussed this last month so I am not surprised by this phased approach.  Any progress on the trade front is positive for the economy and reduces a huge uncertainty for the markets. However, this phased approach means that trade war fears are not disappearing anytime soon.  It will continue to be a huge topic moving into the election year and even with the progress, will cast a shadow over corporate decision making and capital spending.

The details of the agreement have not been released and seem to still be getting ironed out, so the actual economic impact of the agreement is still unknown. However, the major positive I have taken away from this recent round of talks is the change in rhetoric from both sides. Back in August we saw a swift selloff as both sides tried to flex their muscles. And now just a short time later we have seen both sides soften their stances and talk with a much more optimistic tone.  This change has helped to put markets at ease, and this will hopefully continue as the deal is hopefully signed.  The question I have is will this first phase lead to a second or third phase or is this first phase just an attempt to move the trade negotiations to the back burner and remove it from the forefront of economic discussion?  With the election next year, I would not be surprised to see the next phases rolled out whenever the President needs a PR win prior to the election.

Impeachment:  The impeachment inquiry seems to be here to stay.  Last week the House voted along party lines to move forward with a formal inquiry and drew up the roadmap for how they will progress.  This will set in motion a drawn-out, politicized process of hearings and interviews that will only intensify as the democrats move through their primary process. To date, however, the markets seem to be shrugging off the impact of the impeachment inquiry. Unless there is some new bombshell that comes out, we are a long way off from the president being removed from office.  At this point I don’t think removal from office is the short-term goal, but the inquiry will act to weaken the President’s re-election chances.  If the inquiry extends past the election and the Democrats gain control of the senate then this narrative will change drastically.

It will be important to monitor the progress though because markets would react if it looks more likely that the President will be removed or will lose reelection, especially as the Democratic candidate becomes more certain.

Earnings:  So far, earnings have met or exceeded expectations with around 76% of S&P 500 companies beating their earnings expectations.  It is important to point out that expectations were quite low for the quarter so that should be factored in.  Even with this beat rate, we will probably see a slight decline in earnings for the quarter. However, I must also point out that earnings last year were boosted by one-time corporate tax cuts, so it is difficult to make a historical comparison of this year over year decline. The energy sector has also been a major drag on overall market earnings as the sector has seen earnings decline 30%. With the trade progress it will be interesting if we see any analyst adjust any of their growth estimates for the upcoming quarters. I doubt it will have a meaningful impact on the 4th quarter but I expect to see some revisions for next year.

Strategy Commentary


I have slowly been adding back to some of my equity positions but have not gone to a full overweight.  While the markets have rallied, I still see some risks. These risks have diminished over the past month, but we still need to see final confirmation that the progress on the trade deal is real. With the speed the markets have jumped over the past month, I do not want to find myself chasing either. I will use any short-term consolidations or pullbacks to fill out my equity allocation.

Domestically, I am still maintaining my overweight to technology but have rotated out of some consumer discretionary in favor of industrials and financials.  With the progress on the trade front and the expected pause in interest rate cuts both sectors should outperform.  Earnings reports so far also confirm this thesis as the fear of global slow down seems a bit overdone.

I am continuing to stay away from most European markets. My international exposure has shifted to include Japan and some other Asian markets.  With trade progress, selective Chinese exposure has become more attractive and I will look to add to these positions if a trade agreement is signed.

I am maintaining my neutral stance on fixed income.  The pause in rate cuts should provide some support to rates and the rush to safe assets seems to have abated, again muting the downward pressure on rates. I am still favoring the short end of the curve but am not looking to add to any positions right now.

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