Nolte Notes 10.5.2020

Nolte Notes 10.5.2020


Good-bye and good riddance to September, the first down month since the March market bottom. Though the quarter ending in September was very good, investors are increasingly worried about the election. With the revelation that President Trump has Covid, the election “season” gets tossed on its ear. The economic data from last week was generally good. The employment rate fell below 8%. That came as a large part of the unemployment left the workforce, while those looking for jobs took longer to find one. In general, the economic data signals a recovery that is losing its mojo and in need of additional stimulus, which given the President’s condition, may have a better chance than not in the weeks ahead. The coming week will be light on economic data points and will be the lull between the quarter end flurry of economic news and the start of earnings season. It is expected that earnings likely bottomed last quarter. Outside of the technology sector, how much did earnings really pick up from a slowly recovering economy? One final bit of good news. October is known for market crashes. However, it also marks the beginning of the best quarter of the year, especially in an election year.

While the markets snapped their four-week losing streak, it was not a pretty week. Trading volume rose as the markets declined. Investors anxious to buy early, were selling by the end of the day. Those strong opens and weak closes are not healthy over the intermediate term as it indicates stocks are held by “weak” hands. Unless stocks continue to gain this week, the advance decline line will put in the third “lower high” since August. Looking more like steps heading lower, it is another indication that stocks are still struggling to find their footing. A strong week this week could turn that tide and get the markets looking much better heading into the election as well as finishing up the year on a positive note. The market seems to be reacting more in the short-term to political news than the economic data, which is decent, just not as fabulous as it was a few months ago.

Just when things look precarious for bond investors, the bond markets surprise everyone. Yields have been rising ever so gradually. However, the “non-treasury” portion of the market, like corporate and high yield bonds continue to do well, taking their place as “equity like” bond investments. It is in this time of economic recovery that yields typically rise as inflationary fears enter the market, tight supplies, and rising spending. Usually the longer-term treasury yields rise to compensate for higher inflation rates, while corporate bonds “rejoice” as their changes of paying principal increase with economic growth. Surprisingly, the bond model is now actually forecasting lower interest rates. Higher utility stocks and lower commodity prices have been the key in shifting the model toward a better overall outlook on interest rates.

The better utility stock prices highlighted above is not all that great for stocks, as the utility index is performing better than the SP500. Since the SP500 peaked at the end of August, utilities are over 6% ahead of the SP500. Consumer staples and other “defensive” parts of the markets are shining compared to the broader indices. If the more defensive portions of the markets are leading, it pays to be cautious. Even the international portion of the market is doing relatively well. Down for September, but much better than the SP500. Last week the much maligned small, midcap and value portions of the markets took center stage. We have seen this show before, but like Bullwinkle’s hat trick, maybe this time for sure! The typical shift from growth to value has been expected for the past few years but has yet to make more than a month or two appearance. If the economic openings can stick, investors are likely to shift toward the more beaten down portions of the markets, which would mean value over growth.

As if on cue, the markets rallied last week, after four tough weeks in September. October, even with the historical reputation for crashes, marks the beginning of the best portion of the year. If the economic growth can pick up and we see a bit of help from Washington, investors are likely to be rewarded for being invested.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.