Senior Vice President Paul Nolte is interviewed by TD Ameritrade Network on the close of the markets.
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Senior Vice President and Portfolio Manager Paul Nolte was interviewed by Reuters on the current markets.
“This is kind of the eye of the storm,” as investors await more news on interest rates or trade, said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.
But, he said, “for the market to move significantly higher from here, we’d really need to see something happen on trade.”
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Everyone is looking for answers, asking good questions and the best the markets can do is “I dunno”. How’s the economy doing? Where is the market going? Should the Fed cut rates? When will the trade war end? Judging by the markets four periods of 3% or more drops during August, followed by three rallies of 3% or more, there is little consensus on Wall Street about anything today. Listening to the various Fed speakers ahead of their September meeting, they are sounding comfortable just hanging out for a few months and letting the chips fall where they may. The bond market, with its inverted yield curve (short rates above long-term rates), is screaming for a rate cut. Consumers seem pretty sanguine about things, as the consumer confidence polls are near all-time highs, retail sales are decent and jobless claims remain near generational lows. The confusion is not likely to end anytime soon, as the US will be imposing tariffs beginning 9/1 and China is sure to retaliate. Since we have seen this movie a few times, it is a pretty good bet stocks will decline early in the week. The good news is that one of the two worst months of the year is behind us. The bad news is September is here. What is likely to happen next? I really dunno.
The coming week, although shortened by the Labor Day holiday, will be loaded with economic reports, from manufacturing to services and employment on Friday. The Institute for Supply Management (ISM) follows the global Markit report on manufacturing. The US report has been getting weaker since March while the services have remained relatively strong. Based upon the Fed regional reports, it won’t be a surprise to see manufacturing get below 50, an indication of contraction within the sector. Services should stay above the magic 50 level. Friday’s job report should see 160k in new jobs, which is in line with the (new) recent reports on jobs. It is also above the number needed to keep the unemployment rate at current levels. Of course, any negative deviation will provide more fodder for calls of a recession.
The returns from the bond index, the Barclay’s Agg, was the best since late in 2008. The rally in bonds was due in part to a couple of things. First, inflation continues to be below forecast and that has a great influence on long-term rates. As inflation expectations fall, so does the yield on long-term bonds. Second, the on again off again of the trade war is taking its toll on economic growth. Bond investors are making the bet that a recession is close at hand and the Fed will have to drastically cut interest rates to help bolster the economy. Finally, since our yields are higher than most other government yields around the globe, international investors flock to buy US bonds to capture yields not available to them domestically. How low can yields get? Zero is not out of the question and many are starting to think US rates could eventually be negative.
Looking at the asset class battle of performance, the SP500 wins yet again. This time the winning pace was well ahead of the field. For August, the SP500 fell 1.67%, well ahead of small and mid-cap stocks that fell over 4%. Commodities fell by more than 4%, with only gold and silver shining last month, rising by more than 7%. International got close, falling just under 2%, but emerging markets dropped by 3.75%. It has been an SP500 show much of this year, as similar performance differences are exhibited on a year to date basis. This maintains the trend that has been in place, with a few annual exceptions, since the bottom in March 2009. The disparity between and within some asset classes are hitting historic spreads. For example, value stocks are now priced similarly to 2000, when they began an eight-year winning streak against growth. Small stocks, especially the very small are selling near levels last seen in 2009 before they went on a five-year winning streak. The very biggest US companies have done very well, but it has come at the expense of nearly every other asset class. There is a reversion to the mean on Wall Street. We’re just never sure when it will begin.
August was rather volatile, to say the least and September doesn’t look to start any differently. We continue to look at assets outside of the SP500 for the next “big thing” and plenty of areas of the markets are looking rather ripe to perform better than the SP500 names. Trade will continue to be the focus as we head into fall.
The opinions expressed in the Investment Newsletter are those of the author and is 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.