Morning Note: Feels a bit like Q4 2018

At roughly the two-minute mark in last weekend’s video commentary I mentioned the seeming sanguineness of a most-respected macro analyst around how equity markets would react to the Fed tapering its monthly bond purchases. I then said the following:

“I’m on the other side of that opinion. I think the market is going to react negatively; I’ll be surprised if it doesn’t. Particularly if it were to happen right now, when I see quite a bit of concentration on that bull side of the boat.”

Well, while we’re a ways yet from official correction territory (a 10-20% dip) — and keep in mind (clients), we’re hedging against the big stuff (like last year’s Feb/Mar experience), not the inevitable lesser selloffs that tend, ironically, to occur this time of year — suffice to say that the market is indeed reacting negatively this week to the mere mention in the Fed minutes that cutting back the monthly bond purchases is in the near-term offing.

Then of course, as I suggested Tuesday,

“ Clearly, there's lots (LOTS!) going on in the world for the equity market to get the jitters over. There's also, as I mentioned in our recent technical look at gold and U.S. equities, seasonality:

"...by the way, August and September are the only two months of the year that have long-term average negative returns for stocks. So folks, if it gets choppy, and gets kinda weird, seasonally speaking, it's supposed to, right about now."

(Although, one might argue that "weird" aptly describes how impervious the U.S. market has been to virtually [there was a 10% dip in the SP500 last September] anything more than single-digit percent dips since the dramatic action of last spring.)”

And, like I suggested last Thursday, I don’t know that the reflation trade is out of the woods just yet:

“…while, again, we're sympathetic to the notion that the longer-term trade is in the "inflation-linked" market sectors (and regions), JPMorgan's Marko Kolanovic may be a bit too giddy, just yet:

“In particular we like cyclical and reflation-linked market segments, and are cautious on beneficiaries of lockdowns and low bond yields. In fact, we believe that bond yields and cyclicals bottomed last week and are now on an upward trajectory for the rest of the year.””

Clearly, this week’s action says we’re not!

All of the above said, note that literally 7 Fed board members are making public appearances today. We’ll see how, on behalf of markets, effective they are at assuring the world that they’re light years away from any serious tightening of monetary policy. Which, 100%, will be their intent.

In terms of how we view this week in the context of our core allocation; well, ironically, we’ve been discussing the prospects for doing a modest rotation out of fixed income and into areas where we see unusual long-term value. We’re thinking early Q4; after what tends to be the messiest time of year -- anticipating better (lower) pricing.

Well, not that we’re ready to add right here (with other than perhaps a bit of recently deposited cash), if this keeps up we could find ourselves dribbling into our best ideas a bit earlier than expected.

Bottom line, as of the moment, our overall macro assessment, while (per our weekly updates), having waned a bit of late, suggests that we're seeing what for now is a, albeit minor at this point, selloff within the context of an ongoing expansion. Which was our position during 2018's Q4 taper tantrum that saw the S&P 500 down 19.8% start to finish, before bounding back to new all-time highs over the ensuing months.


Asian equities got hammered overnight, with all the markets (that were open) closing notably lower, save for New Zealand.

Europe's a mess this morning as well, with 16 of the 19 bourses we follow trading lower (several by ~2%+) as I type.

U.S. equities are off across the board: Dow down 163 points (0.47%), SP500 down 0.48%, SP500 Equal Weight down 0.41%, Nasdaq 100 down 0.50%, Nasdaq Comp down 0.58%, Russell 2000 down 0.92%.

The VIX (SP500 volatility) sits at 22.60, up 4.27%.

Oil futures down 2.71%, gold's down 0.17%, silver's down 0.80% copper futures are down 1.63% and the ag complex is down 0.88%.

The 10-year treasury is up (yield down) and the dollar is up 0.27%.

Led by utility stocks, consumer staples, solar stocks and Verizon -- but dragged notably by KRBN (carbon credits), metals miners, oil services stocks, Mexican equities and Nokia -- our core portfolio is off 0.77% to start the session.

"People get all excited about the price movements, but they completely misunderstand that there is a bigger picture in which those price movements happen. Price movements only have meaning in the context of the fundamental landscape. To use a sailing analogy, the wind matters, but the tide matters, too. If you don’t know what the tide is, and you plan everything just based on the wind, you are going to end up crashing into the rocks."

--Colm O'Shea 

Have a great day!

Marty