November 2018 Update
I'm Thankful for Rational Markets
It is puzzling when prices deviate from the fundamentals. Investors assess information as it becomes available; when the market doesn’t agree with their thesis, they seek information that justifies their hypothesis. This confirmation bias is a dangerous feature of human behavior. Financial media tries to find a reason for every move in markets; often it is simply normal market behavior or a continuation of an underlying trend.
I wrote our Q3 update before stocks fell sharply in October that I was concerned by the divergence between the stock markets of the two largest economies, the U.S. and China. China was and still is in a bear market, down squarely over 20% while the U.S. was up 9%, which is now flat YTD. Asian markets suffered the brunt of tariff talks and slowing GDP forecasts; the U.S. outperformed.
Since then, U.S. stocks (Russell 3000) proceeded to fall about 10% from their mid-September peak before climbing, then falling again in November. The Nasdaq Composite peaked at the end of August and is now down about 13% from its high. Today (11/19) the Nasdaq closed down 3% as the popular “tech” names continued lower. The big “growth” names in tech (think FAANG) are down 20% - 40% from their peaks. It is nice to see that the market doesn’t stay irrational forever – valuations do matter.
In the last update, I highlighted the importance of the housing market and how fundamentals were shaping up. Mortgage rates ticked higher, now at 4.76% (bankrate.com) and sentiment among builders (NAHB) just fell 8 more points, reported on 11/19, the lowest level since 2016. It has been falling since the start of the year. U.S. housing stocks are down about 28%from their high and they’re among the worst performing group this year. The homebuilders peaked in January; while the major indices peaked again in September, the homebuilders failed to gain ground. These are important divergences, considering housing is an important driver of the economy.
Oil needs to be highlighted again – in my last update, I showed the divergence between price and supply – the US and Saudi Arabia were at record production, yet WTI and Brent pricesclimbed to over $75 and $85, respectively, in the first week of October. Following the update, prices imploded about 25% through mid-November, which is a substantial move for a major commodity in that timeframe. It was the greatest monthly volatility since 2014 when crude prices collapsed. Paying attention to the bigger picture (supply) was and is critical. Natural gas is another story I’ll cover in the next report.
In the Q3 update I covered tax cuts and increased government spending. Another divergence: the government now has less revenue but continues to ramp up spending and borrowing to fund that spending. The US government ran a deficit of $100.5 billion in the month of October. That’s over $1 trillion annualized. Eventually, national debt will impact our currency – but this is a longer-term structural problem.
Looking forward, I expect the G-20 summit, beginning Nov. 30, to affect the direction of markets. We may get clarity on global trade, particularly between China and the US. Good or bad, the market should be given some direction.
Markets move fast - if you aren’t current on assessments beforehand it’s difficult to make good decisions when prices change. By studying the important and occasionally overlooked information one can be prepared when one needs to be.
"Give me six hours to chop down a tree and I will spend the first four sharpening the axe." - Abe Lincoln
Have a nice weekend.
Northstar Investment Management
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Marquette, MI 49855
This is not investment advice and may contain forward-looking statements. Readers should do their own due-diligence and fact-check. Asset prices will have changed from the time of writing. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Securities and Advisory Services offered through Commonwealth Financial Network, member FINRA/SIPC, a Registered Investment Adviser. 307 S. Front Street, Suite 107 Marquette, MI 49855. 906-226-6056