Markets have been roaring to start the new year. The S&P 500 index was up 7.87% in the month of January and the All-World Index (ex-US) was up a similar amount. This on the heels of the worst December on record.
What changed? At first, nothing…
But then, the Federal Reserve (the Fed) appeared to get the message from the markets that our economy isn’t ready for higher rates and the removal of accommodative policy. It took a couple months – but it seems like the message was received. Back on November 5th I said:
“Everyone wants a reason when the market sells off. As I like to say – it’s 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 $50B/month - which we finally reached in October 2018.
We started to see volatility creep back into the markets shortly after the program started with the correction in late January hitting global markets. What is interesting to me is that the rest of the world never really recovered from this drop. Year-to-date the All-World Excluding US Index is down 14.39% while the S&P 500 is essentially flat after both were down after the initial drop which bottomed on Feb 8th.
It seems to me that the Fed is sucking dollars out of the global economy and these dollars are first coming from Emerging and Developed Markets – which is completely sensible. On top of that, companies are repatriating capital that has been outside the US for a long time – consuming an even larger share of the remaining available dollars. This strong dollar is creating major issues around the globe.”
The dollar index ($DXY) closed 11/5/2018 at $96.315. Today it sits at $96.05 – so, not much has changed there – the dollar is still strong and so what I wrote still applies.
And on top of that we have a looming government shutdown (and one barely in the rearview mirror) and a deadline looming large in the China trade situation.
We have continued to cautiously allocate capital over the past couple weeks. I still don’t see the odds as being in our favor for a quick return to new all-time-highs.
As earnings keep rolling in, we will continue to look for value where ever it can be found. With a commitment to proper position size, and rules-based entry and exit strategies we are ready for whatever comes next.
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Chief Investment Officer
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