Market Update
(all values as of 09.30.2020)

Stock Indices:

Dow Jones 27,781
S&P 500 3,363
Nasdaq 11,167

Bond Sector Yields:

2 Yr Treasury 0.13%
10 Yr Treasury 0.69%
10 Yr Municipal 0.84%
High Yield 5.77%

YTD Market Returns:

Dow Jones -2.65%
S&P 500 4.09%
Nasdaq 24.46%
MSCI-EAFE -8.92%
MSCI-Europe -10.53%
MSCI-Pacific -6.19%
MSCI-Emg Mkt -2.93%
 
US Agg Bond 6.79%
US Corp Bond 6.64%
US Gov’t Bond 8.04%

Commodity Prices:

Gold 1,892
Silver 23.37
Oil (WTI) 39.88

Currencies:

Dollar / Euro 1.17
Dollar / Pound 1.28
Yen / Dollar 105.60
Dollar / Canadian 0.74

 A Little More to Go For?

The chart below shows the inflation adjusted Dow has risen by 156% since the market lows in 2009.  Of more interest are the trend lines (channels), which have identified the tops and bottoms over the years.  The DJIA is approaching the top end of the channel, which with one exception (2000-2001), has called the top.  On this chart, there is a little more to go for on the Dow.  There is not a lot of room on the upside, so we would look at this as an early warning signal that the big cap/blue chip part of the market is pricing in a lot of good news.  An example is Apple, which announced $210 billion in share buybacks over the next two years and the stock fell after the news.  Buy the rumor, sell the news.  Sell in May and go away.  Bulls make money, bears make money, pigs don’t.

International Allocation

The uncertainty regarding the French elections was removed with the victory by Emmanuel Macron over Marine Le Pen.  The Macron win probably sets up at least one year of clear sailing from a political viewpoint- no Hollande, some French reform, Merkel looks safer in Germany and there is time to sort out Italy/Spain. The Brexit negotiation with the UK may not go smoothly, but we doubt the markets will price a negative outcome for another twelve months. Meanwhile, business is pretty good in Europe. So the breakout pattern which has appeared in European equities and their outperformance vs. U.S. stocks may well accelerate with the Macron win. Shamrock’s tactical strategy will be adding exposure back to European equities.  It is important to remember that the recovery in the Eurozone is only 3 years old, interest rates are zero, and the European and Japanese central banks are still buying bonds to promote growth.  The Eurozone feels like the U.S. in 2012-2013 and thus we believe European economy is picking up momentum.

 

 

Emerging Markets

Meanwhile, the emerging market currencies look quite cheap vs. the USD. The U.S. economy needs a lower Dollar, which is one reason we think the Fed will not unwind their balance sheet this year and if GDP numbers start to decline, the Fed may even have to back off on 2 more rate hikes in 2017. To engineer a lower Dollar, the other side of the USD – the Euro and EM currencies, need to appreciate. In the case of EM currencies, they are low and capital flows are returning to key countries such as Brazil, Mexico and Indonesia. Shamrock would not be at all surprised to find Chinese investment flowing into Brazil and even Venezuela.  Mexico is another destination for EM capital as we do not view NAFTA reform as harmful to Mexican interests, in fact it could be beneficial. Whether the U.S.-Mexico-Canada re-align themselves into more of an internal market to compete with China, or U.S. growth is boosted by the U.S. authorities turning their attention to developing the domestic energy/technology/infrastructure industries, Mexico can benefit.

EM currencies are low compared to where they have traded since the 2008 financial crisis and EM bond markets carry meaningful yield advantages to U.S. Treasuries. The commodity related EM currencies may be at timely points as we think the Chinese economy will turn up in 2nd half of the year. If China turns up, commodities turn up and countries which supply commodities will outperform. We must also not forget India, which is growing strongly and is seeing inflows of capital.

Inflation vs. Deflation

The Fed was focused on core inflation early in 2008, but their principal objective now is reflation.  A long period of above normal inflation, which inflates away America’s debt, is quite possibly the desired outcome of the Fed’s monetary policy.  A period of higher inflation is not impossible once deflationary forces abate, economies accelerate and the velocity of money picks up.  Is inflation the outcome the Fed wants?  The answer seems to be “yes”.  Will the Fed ever again be able to raise interest rates quickly or too high enough levels to fight inflation (if it appears) or will they choose to let inflation run, given the debt overhang which exists in the consumer/government/ financial sectors and the interest expense increase involved?  Letting the economy “run hot” seems to be the course the Fed is on.  One of the most powerful disinflationary forces is the ongoing reduction of headcount in some economic sectors, which still has a long ways to go.  As the robot/technology revolution unfolds, other parts of the economy will experience job losses, and additional deflationary impacts.  M2 is at +6.3% annually, while M1 is at +8.8%.  Plenty of money is available in the banking system thanks to quantitative easing, but the velocity of money remains low and will remain low until loan demand from the real economy picks up dramatically.  It appears the Fed is still fighting deflationary forces.