Market Notes

November 5, 2018

The S&P 500 was down 6.94% and the All-World Ex-US index was down 8.21% for the month of October. Its scary out there – Happy (belated) Halloween!

The President is openly criticizing the Federal Reserve Bank (which is about as Federal as Federal Express [NYSE: FDX] for what it’s worth) for raising short-term lending interest rates and putting the proverbial brakes on the economy. Meanwhile he is applying massive trade tariffs on China further disrupting international trade and creating uncertainty for even small domestic companies who depend on an increasingly complex and global supply-chain to operate profitably. All the while, corporate debt is the largest it’s ever been relative to GDP because with rates so low over the past several years the obvious move for corporate CFOs was to borrow more money to keep the doors open or even expand operations – whether profitable or not.

The artificially low interest rate policies have created a situation where several companies that should probably have lost access to the capital markets – and gone bankrupt – long ago have been allowed to operate and even borrow more. This is unquestionably unsustainable. There are several companies within the S&P 500 that don’t currently generate enough cash flow to even pay the interest on their debt today – let alone the principal - and the bill is only going to go up as interest rates rise and the old debt matures and must be refinanced. Many of these companies may even lose their ability to borrow more to refinance the debt – see Toys ‘R Us as a recent example.

Everyone wants a reason when the market sells off. As I like to say – its just that more sellers came to market in October than did buyers. Now, why that happened – is of interest. Perhaps it is because the Fed is now pulling $50B from the markets and that money must come from someone selling something somewhere. The Fed started pulling $10B/month out of the market back in October 2017, gradually increasing the amount each quarter to a target of $50B/month - which we finally reached in October 2018.

We started to see volatility creep back into the markets shortly after the program started with the correction in late January hitting global markets. What is interesting to me is that the rest of the world never really recovered from this drop. Year-to-date the All-World Excluding US Index is down 14.39% while the S&P 500 is essentially flat after both were down after the initial drop which bottomed on Feb 8th. 

It seems to me that the Fed is sucking dollars out of the global economy and these dollars are first coming from Emerging and Developed Markets – which is completely sensible. On top of that, companies are repatriating capital that has been outside the US for a long time – consuming an even larger share of the remaining available dollars. This strong dollar is creating major issues around the globe.

And so here we are. Major averages have remained under their 200-day averages for the longest stretch since early 2016. This is bearish behavior, to be sure, but we didn’t have a bear market in 2016 – in fact it was a great buying opportunity. Things are different now, they always are – except for the ways in which they are always the same. Things that cannot go on forever won’t.

We are following our stops and looking for reasons to get long. We’ll consider adding to our best ideas ahead of elections, and again afterward depending on the action. 



Shane Fleury, CIO

Elevate Capital Advisors

Legal Information and Disclosures

This commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Elevate Capital Advisors, LLC (“Elevate”) has no duty or obligation to update the information contained herein.

This information is being made available for educational purposes only.

Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Elevate believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. 

This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Elevate.

Further, wherever there exists the potential for profit there is also the risk of loss.