Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Mr. Market Keeps Low Profile Ahead of Election?

It was really a dull week for stocks. After some positive action leading up to Wednesday’s FOMC minutes, in which there was virtually no change to policy, stocks began to leak again on renewed concerns over interest rates. The Dow, S&P, and NASDAQ all finished the week relatively unchanged. Beneath the surface, though, there was a slight defensive bias at work as industrials, transports, energy, and tech were softer, while consumer staples, utilities, and large banks (oddly enough) rounded out the list of out-performers. Parenthetically, banks have expanded their leveraged loan books to $1.27 trillion, which surpasses the entire junk bond market in terms of size – and probably risk.

The only real action to be found this week was in the dollar, where a rally ensued in response to off-the-cuff remarks reflected in the FOMC minutes. Powell expressed concern that, “a rise in the dollar due to the Fed’s hawkish policy poses risks.” I assume he’s thinking of corporate earnings, but I am not sure. This comment, taken with some setbacks in Chinese trade negotiations, caused a pop in the dollar of 1.2% off the week’s lows, which put the greenback within striking distance of near-term highs around 96. Normally this would have put pressure on the metals, yet they held above recent breakout levels and look poised to rally further once short-term dollar buyers are exhausted.

I say short-term dollar buyers because it’s unlikely the Fed can maintain its hawkish stance as the economy continues to slow. Natural disaster spending is in rapid decline and rates remain interminably high, for reasons discussed here before. For those of you who follow politics, it’s reasonable to conclude that the Fed won’t do anything dramatic ahead of the elections – which are two and half weeks away. As for the numbers: September housing data contracted – again. Permits fell 0.6%, starts fell 5.3%, and existing sales dropped 3.4%, consistent with 2015 levels. Mortgage apps also fell 7.1% to the lowest level in more than a year. Aside from this, retail sales came in at 0.1% growth – far short of the expected 0.6% (led by sharp declines in gas and restaurant spending) – while the US budget deficit expanded to a cool $779 billion (up from the mid-500s last year). The one bright spot, if it can be called that, was the Philly Fed index. It rose to 22.2 – above its August low of 11.9, but still far below its high of 36.07 set in November 2014.

Away from all this, the slightly more defensive tone in the market seemed to benefit only the German Bund, which saw its 10-year yield drop 12bps. This is in contrast to PIIGS debt, where Spanish 10-year yields rose 16bps after the folks in Brussels dictated tighter budget controls. Most other debt finished the week relatively unchanged, including Treasuries. Crude oil fell for the second straight week in sympathy with stocks and weaker economic data (especially in China). Next week, we’ll get more on home sales, GDP, corporate earnings (as well as guidance), and more about China trade, I presume.

Best Regards,

David Burgess
VP Investment Management