Market Update
(all values as of 10.30.2020)

Stock Indices:

Dow Jones 26,501
S&P 500 3,269
Nasdaq 10,911

Bond Sector Yields:

2 Yr Treasury 0.14%
10 Yr Treasury 0.88%
10 Yr Municipal 0.94%
High Yield 5.72%

Commodity Prices:

Gold 1,878
Silver 23.72
Oil (WTI) 35.71

Currencies:

Dollar / Euro 1.17
Dollar / Pound 1.29
Yen / Dollar 104.44
Dollar / Canadian 0.75
 

Biggest Risks to the Stock Market

Elections in Europe & the Efficacy of the European Union

The French election has tightened and recent polls have Melenchon, the Communist candidate (who advocates a top tax rate of 100%) polling up to 18%, Fillon is at 19%, while Le Pen and Macron are each at about 23%. Melenchon’s leap in the polls after the last debate, (there will not be another debate before the first round vote), is worth thinking about.  A Le Pen-Melenchon second round contest between a man who wants to tax high incomes at 100% and Le Pen who wants out of the Euro would be a nightmare for the markets.   The outcome of the French election could quickly cause the Euro to weaken and the Dollar to strengthen.  A stronger Dollar would cause an ever-larger problem for Asian borrowers, who have at least tripled their Dollar debt outstanding since 2008.  Emerging markets have sold trillions in Dollar debt since the Global Financial Crisis (GFC), leaving a strong Dollar as one of the potential catalysts for an emerging market melt-down similar to the Asian Crisis of 1997.

 Watching the VIX
The markets seem to be focusing more than ever on the French election.  A safety trade is developing in US Treasuries as 10-year yields fall, gold rises, but the VIX still acts as if nothing is wrong.  The VIX is the coiled spring, which seems to have plenty of shorts in it (sellers who have an income need, so they sell VIX for premium).  VIX futures are now in backwardation, which is not a common occurrence.  In fact, VIX futures have been in backwardation for more than a week and still US equities have sold off only mildly.  This is a side comment, but if you look at the valuations of US defensive stocks, they are expensive, but the psychological buzz is that the economy is growing.  So either defensive stocks are very overpriced or the economy is not recovering as fast as the employment data suggests.  The VIX Index itself on the US market has been volatile in recent days, suggesting an important market movement is coming.

 

 

 

Tax Reform

President Trump’s economic plan centered on increasing US GDP through tax cuts, deregulation, and fiscal policy.  With the Republicans in control of the House, Senate, and White House the stock market rallied in  anticipation of swift actions.  Fiscally conservative republicans are unwilling to support an administration that continues to raise the US debt burden.   By Repealing & Replacing Obamacare, the money saved would act as an offset to Trump’s fiscal spending plan  for infrastructure and tax cuts.   Without corporate tax reform, earnings estimates for equities that have been pushed up since November 9th, will be lowered and the PE on the S&P 500 will be too high.  A PE multiple of 16x-18x on flat earnings is pretty expensive. If the timeline for tax reform becomes uncertain, stock prices are vulnerable and the VIX is too low.  If the stock market matters to the White House, get the Dollar down, move corporate reforms and individual tax relief to the forefront. The stock market will respond positively.

Pullback in Equities is Incomplete

The recent pullback in global equities remains incomplete.  Leadership groups such as the US banks (Majors and Regionals), have softened, but not undergone intense selling pressure. Their modest pullback has occurred despite a fall in 10-year Treasury yields and one Fed rate hike.

The stock market has traded sideways since peaking in early March and it looks to be under pressure without additional positive developments from Washington.  The elections in France, Italy, and Germany will also have huge implications on market directions this summer.  Shamrock still views a recession as unlikely, however the likelihood of a correction between 5 and 10% could occur in the near term.  Our investment strategies are designed to raise cash if risks become elevated and large declines are imminent.