Market Notes

October 5, 2018

Major US markets finished September with positive returns with the S&P 500 index up 0.43%. The rest of the world put in a positive number for the month as well with the MSCI All-World (excluding USA) up 0.19%. This is an improvement over the year-to-date situation where the All-World (ex-US) is down 5.25% vs. the S&P 500 which is up 8.99% this year. That is quite the divergence and as arithmetic would dictate - broadly diversified portfolios are all underperforming the S&P 500 this year.

Here is a quick look at how major equity markets have fared this year through the end of the 3rd quarter – Japan and Russia have joined the USA and France in the black:

This divergence is not going unnoticed. We have sold the majority of our international positions - the only country ETF we own today in portfolios is EWJ, the Japan index. In US sectors, our remaining sector-focused play is Healthcare – the best performing sector of the year within the best performing country of the year (so far). We’ll take it. We also maintain a larger exposure to the Nasdaq than the S&P 500. We’ll take that too.

Bonds are struggling overall this year with the 10-year US Treasury yield surging higher by over 30%, now sitting at 3.22% as of this morning. Rising yields reduce the current value of existing bond positions – but not the maturity value. Still, that doesn’t stop investors from selling bonds and in particular, bond funds. Here is a look at the major bond indexes for the year:

Since our last blog, the dollar has actually strengthened materially with the increase in interest rates here in the US, even with a slight weakening as we worked out trade deals with Canada, Mexico and South Korea. Deals with the European Union and Japan are still in the works.

Relations with China seem to have deteriorated materially with China’s Vice Premier Lie He cancelling a trip to Washington to meet with Treasury secretary Steven Mnuchin, as President Trump announced the enforcement of tariffs on an additional $200 Billion worth of goods from China.

The Federal Reserve Board (the Fed) also met in September and decided to raise the overnight lending rate (that banks charge to each other for overnight loans) by 0.25% to a target range of 2%-2.25%. The market seems to fall each time Fed Chair Jerome Powell speaks to reporters – even though he expressed optimistic outlook on the US economy. He essentially communicated that the increase in rates is a function of underlying economic strength.

Many economists and market-watchers are considering the positive domestic economic data and pushing out forecasts for recession to 2020. We are hesitant to join this group with the rest of the world having such a hard time. Recent moves in the 10-year yield however, have indeed steepened the yield-curve pushing out any forecast for an inversion – which we have been watching closely as an indicator of recession.

Earnings season in the US is about to get underway and expectations are high and creeping higher for 2019. As we like to say, shopping trumps politics and so hopefully folks are out there spending the money they have from tax-savings.

In summary, there is a bull market in the United States – and not really anywhere else.

Many of the sectors we track in US markets we rate a “buy”, but most of our systems tracking foreign investments remain a “sell”. We really want to own the US going forward, until things turn around in international markets and that’s why most of our portfolio is in the US, today. We like gold here, but it is a little too early to call an uptrend in the commodity – especially with the dollar powering higher along with interest rates. Gold seems to at least be finding a bottom, for now.


The divergence between the US and the rest of the world is concerning. We will continue to monitor the situation, follow our trailing stop-losses and focus on allocating to value in US markets for the time being.


Shane Fleury, CIO

Elevate Capital Advisors

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