Recap & Outlook: Macro Machinations

Last month markets generally rallied and pushed to new highs. We also noticed price volatility decreased. At the beginning of this week, headlines in the financial and political press turned negative. Markets subsequently “gave up” the August through October gains with two very negative days. At the end of the week investors/traders/speculators seemed to have calmed down somewhat and markets rallied back a bit:

  • Figure 1 presents an ugly print from the Institute of Supply and Management report. This report provides an outlook on general business activity. The blue line indicates that general business is slowing while the the green indicates that exports have not been this bad since 2009. We believe this comes from sentiment related to the US and China trade war.
  • Figure 2 presents employment data. As you can see, the unemployment rate reached a 50-year low. With low unemployment, low inflation and increasing wage growth, the US consumer is still healthy.
  • We read a number of industry reports from investment banks and research houses. It seems from the tone of those reports that the investment community is expecting the US Federal Open Market Committee (FOMC) to decrease its administered rate at the end of the month. We are also able to confirm this view with fed futures data that we regularly track. The FOMC would do this to shore up business and investor confidence in order to extend the economic cycle, which is already the longest in history.

This means that” The first chart shows that there is concern with US businesses and industry (i.e. we should be concerned about this). It caused an ugly market reaction at the beginning of the week. The second chart shows that employments and subsequently the consumer is still strong (i.e. the consumer is two thirds of GDP, so this is good news). This is the crux of the debate that is going on in financial markets right now. We have previously mentioned this in past Investment Outlooks. We hold cash in a number of our mandates both as a risk mitigator and for the opportunity to add good quality businesses at a fair price. Recent volatility has allowed us to both buy and sell these businesses.

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