Market Musings

By: Erik Moisan

Clarity is very important, and so I begin this note with an apology to those who were unsure of the meaning of my last comments. In the note date November 1, I asked a question: “Is this the beginning of the end?“

I will remind everyone that October saw the TSX shed 1125 points, or 6.97% while the S&P500 lost 214.55 points or 7.33%. In terms of 2018 performance at October 31st, TSX is off 1,282.71 points, or 7.86% while the S&P500 was up a mere 15.93 points, or slightly over one half of one percent.

I am not convinced (based on a few follow-up emails and calls) that I was clear in my answer, following my explanations and listing of data. The answer is NO. While it is true that we are late in the cycle, the data still supports equity prices and equity price advances.

What we went through in October in terms of equity prices, as well as the poor performance of the overall bond market (due to rate hikes – down 4.3% for 2018 at October 31, as proxy by the Bloomberg Barclays U.S. Aggregate Float Adjusted Bond providing broad exposure to U.S. investment grade bonds ) this year are normal occurrences. Hopefully, you still have the attachment from the November 1 post, and can refer to it for some historical perspective.

While this leads many to question, let’s get back to fundamentals and specific indicators:

Global growth has slowed, but is still expanding
Yield curve indicators (the 2-year vs 10-year, the 1-year vs 10-year, the new Fed model of US recession probability, etc.) are NOT indicating a recession. The 2-and 10-year spread remains at about 25 basis points.
The ISM manufacturers index, which has always concurred with recession periods by dipping below 50 (during recessions (caveat: it has dipped below 50 when no recession has occurred, but for our purposes, it has never not been below 50 during recessions going back to 1948). It is currently at 57.7 (last read).
The economic surprise index in the US is positive (negative in Europe though).
Unemployment claims in the US are down to 214K.
High frequency retail sales growth is trending higher, currently at 6.1% over last year.
While the US economy was growing at 4.2% last quarter, it has fallen to 3.5% current read, but this is still a healthy number.

The US and Canadian equity markets have recoup some of the October losses, and those two markets are not providing much conviction this morning, but the data supports equities for the time being. Perhaps more importantly, the data is contra recession, which is the key element on my radar at the moment.

Please keep the comments and questions coming. I appreciate the feedback.

Have a great remainder of November, Happy thanks giving to our US friends.