November 2014 Monthly Strategy Dashboard

October Comes in Like a Bear, Goes Out Like a Bull

The first half of October fed the stock market bears and lived up to its fearsome reputation as a month for market declines that produce buckets of angst and the gnashing of teeth among the denizens of the markets.

Then, just after the VIX had spiked to near a three-year high and after the S&P 500 had shed nearly all of its gains for 2014, October released its bear grip on the bull as a veritable posse of solid economic data and better than expected Q3 earnings came across the proverbial transom, moving sentiment from "risk off" to "risk on" and boosting stock prices to new record highs – and sending Treasury yields back towards the path of normalization.

Looking Ahead:

We expect that after the market stateside digests the analysis and projections on the meaning of the mid-term election, it will once again seek further confirmation from economic data, revenues and earnings.

Investors should increasingly look for signs of progress and conviction from Europe and Asia, particularly in their officials’ current efforts to balance factors that include deflation, reform, stimulus, austerity and rebalancing of economic dependencies. All of these will be elements key to global recovery.

The decline in the price of oil and the strength of the dollar will remain thematic issues of concern and impact on a day-to-day basis for now. As in the past, they will ultimately prove to be evidence and confirmation of major changes taking place on the global economic landscape.

Curiously they are a result in large part of the same factors that have driven the secular story in interest rates. Such factors or trends are driven by globalization and technology at levels disruptive but also full of opportunities as well as risk.

In the Near term:

From here forward we'd say the equity markets will rely more on traditional supports including economic growth, revenues, earnings and expectations of sustainable growth.

The training wheels are off!

QE is off the table with next year likely to see some upward tweaks on the Fed Funds rate.

We look for the Fed to maintain transparency and continue to stay on track with a transition from Bernanke-Yellen "recovery era Fed" to a more normalized regimen.

That said, secular trends tied to the ubiquitous nature of technology (robotics on the factory floor and algorithms in the offices keeping hiring and wages in check) point to the need for the Fed to remain vigilant to keep disinflation from diluting the central bank's efforts to reflate the economy.

We expect the Fed will ultimately succeed in its efforts.

For now the environment continues to point to equities as the asset class to focus on.

John Stoltzfus

Chief Market Strategist November 11, 2014