Market Strategy Radar Screen Weekly November 05, 2018

Goldilocks Has Left the Building

Markets still seem not to have realized that the Fed has been hiking rates for nearly three years

Stateside investors return to the market this week facing a busy calendar with mid-term elections on Tuesday. According to pollsters, the elections are likely to deliver results in terms of gains in the House of Representatives by Democrats that will reintroduce the markets and the country to political gridlock in the US Congress.

Historical reference points cited by pollsters, historians, market observers and market participants signal that gridlock would likely not be a decidedly difficult outcome for the markets to digest and likely not an impediment to further upside in the trajectory of the equity markets in the foreseeable future.

From our perch on the Market Strategy Radar Screen we’d fathom that the biggest surprise on Tuesday for the markets to ponder would be one that would parallel the November 2016 Presidential election in delivering a surprise outcome counter to professional pollsters and many others expectations.

A surprise outcome this Tuesday might arrive in the form of the Democrats not gaining control of the House of Representatives, thus extending the Republican control of both houses of Congress. Another surprise outcome would be if the Democrats managed to gain control of the Senate in addition to the House.

However, neither of our surprise outcomes is likely to be realized with professional pollsters according to Barron’s this week posting chances for the Democrats to win control of the House and for the Republicans to maintain control of the Senate at 6 in 7 or 85%.

As market strategists we are quick to remind our readers that we are politically agnostic and neither professional political pollsters nor predictors. We’ll keep to our wheelhouse tending our fields within the markets and across asset classes.

That said, we urge our stateside readers to exercise the privilege of voting in this year’s midterm election on Tuesday, November 6.

Beyond the election investors will have the outcome of the Fed’s FOMC meeting to ponder (it’s scheduled to end on Thursday). The Fed is not expected to raise its benchmark rate at this meeting. Instead Fed funds Futures indicate a 74% probability for one last hike when the Fed meets in December

The non-farm payroll number released by the Labor Department last week exceeded consensus estimates for 200,000 jobs added in October by hiring an additional 50,000. The headline unemployment number remained unchanged at 3.7% (the lowest level since December 1967) while average hourly earnings rose 3.1% year over year (See details on page 4 of this report).

The overall good news for the economy caused some uneasiness among investors prone to worry about the strength of the economy pushing the Federal Reserve to grow too hawkish. We continue to believe the Fed will remain prudently sensitive to the pace of growth in the US economy as well as to the vulnerabilities within it and persist in an approach that has successfully brought the economy from the depths of the financial crisis in 2008 to the current economic expansion.

Market Sentiment Turned Last Week

Last week saw the end of a turbulent downside experience for the broad market turn into a three-day rally through the last two days of October and the first day of November as investors recognized attractive valuations in stocks and a Q3 earnings season that has seen the S&P 500 exceed analyst consensus expectations (see details on page 3 of this report).

By last Friday, the market showed worry related to the US/China trade conflict and the aforementioned better-thanexpected jobs number and solid gain in hourly wages.

For the week ending last Friday the Dow Jones Industrial Average, the S&P 500, the S&P 400 (mid cap), the Russell 2000 (small caps) and the NASDAQ (41% weighted in technology or tech-related stocks) posted respective gains of 2.36%, 2.42%, 3.75%, 4.32% and 2.65%.

For the month of October those same indices closed the month with respective losses of 5.07%, 6.94%, 9.63%, 10.91% and 9.2%.

As Q3 earnings season begins to wind down look for the market to hone its attention to any evidence of progress that could lead to a resolution to the trade war between the US and China as well as signs from economic data and corporate news flow as to how companies are navigating the trade situation.

Last week saw rallies outside the US with gains evidenced in the performance of major international equity benchmarks over the course of the week.

MSCI EAFE (developed markets ex-US & Canada), MSCI Emerging Markets and MSCI Frontier markets respectively gained: 3.33%, 6.08%, and 2.62% last week. For the month of October those same indices respectively declined: 8.03%, 8.78% and 3.55%.

The nervousness about trade and rising interest rates exhibited in the global equity markets even as they rallied on the week tells us that “we’re not out of the woods yet” from October’s pullback but rather that we are “well on the path headed out of the woods.”

Investors should expect that as the calendar distances us from October just ended challenges remain including those from trade war risks and interest rate concerns prevalent in the market today. In such an environment investors should expect that their conviction and patience are likely to be tested from time to time.

Know what you own, why you own it and have reasonable expectations as to how what you own is likely to perform in differing scenarios on the path toward your goals. Keep open to looking for “babies that get thrown out with the bathwater.”

For the complete report, please contact your Oppenheimer Financial Advisor.

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