I hope everyone had a great Halloween weekend. I was happy to see all of the trick-or-treaters showing up to our house over the weekend but unfortunately I did not plan well on the candy front and had to turn some of the kids away empty handed…. Fortunately our house made it through in one piece. It seems the children in Shanghai take the trick part of trick-or-treat much less seriously than they do where I grew up, for in St. Louis it would have been a jack-o-lantern horror show.
Getting on to financial news, as we mentioned for the last couple of weeks, the stock market is in correction mode. It is notable that in this earnings season, several bellwether companies have missed estimates and they have disappointed the market. Furthermore, most corporations have lowered their forward guidance. These are negative developments which imply that a global business slowdown or recession may be around the corner.
Euro
In the investment business, nothing is set in stone but when a market sells off on positive news, it’s not usually a great sign. For instance, only a few weeks ago, Mr. Draghi pledged to save the Euro and Mr. Bernanke unleashed an open-ended QE. However, rather than stage an impressive advance on such bullish news, the stock market failed to rally and Wall Street has now sliced through its September low. Furthermore, given the ongoing slowdown in the global economy, it is conceivable that stock prices may continue to slide for several weeks or months.
Looking at technical data, it’s worth noting that the leading growth stocks are selling off on heavy volume and in addition to this, the Volatility Index (VIX) seems to have turned and fear is on the rise. On a short-term basis, the stock market is oversold, so a bounce may come any day. However, unless the major US indices manage to climb above their September lows, the trend will remain down.
US Dollar
In the currencies patch, it is interesting to note that despite the Fed’s QE-ternity initiative, the US Dollar is refusing to break down and this is a sign of strength. Remember, the American central bank is creating US$40 billion out of thin air each month. This implies that the ongoing private sector debt deleveraging is thwarting the Fed’s inflationary agenda. At present, the US Dollar Index is sitting just below its overhead resistance and a close above the 80.21 level will usher in the next uptrend. If the US Dollar manages to clear that level, it will imply that the Fed’s QE program is not working and strength in the greenback will be bearish for all risky assets.
Finally, over in the bond market, US Treasuries have weakened a tad but given the state of the economy, this selling should be transitory. If the US economy slows down or contracts, long dated US Treasuries will probably rally and the yields may decline to record lows. Elsewhere, high yield corporate bonds are still an interesting option for income-seeking investors, although they may also suffer during a recession. Thus, if you do not need the income or are unwilling to withstand near term volatility, now may be a good time to exit this space.
For Austen Morris Associates’ investors – remember to hold a balanced portfolio and talk with your advisor about any repositioning to take advantage of markets at this time. For more updates on the world financial news please visit our Weekly Global Economic Outlook.
Hope you have a great week.
Co-Head of Portfolio Management,
Bill Longstreet
Austen Morris Associates Wealth Management & Investment Team
www.austenmorris.com
