Equities have traded in a narrow range during the first three weeks of October. The quarter opened with a sharp selloff, but prices quickly rallied back to near quarter ending levels. The rebound was followed by another decline before a steady, but modest upswing that developed over the past five trading sessions. Global stocks have followed roughly the same pattern. Brexit negotiations, trade talks between China and the US and impeachment squalls in Washington have captured most of investors’ attentions. Third quarter earnings reports have begun to arrive and will likely draw more of the market’s focus as the trickle becomes a river over the next 3-4 weeks. The S&P 500’s last 12 months’ closes are illustrated below
In the credit markets, Treasury yields are little changed for intermediate and long term maturities so far this month. The 3-month T-Bill, however, has seen its yield decline a hefty 18 bps to 1.63% since the end of the third quarter. Traders expect another ¼% cut in the Fed Funds rate target range to 1 ½%-1 ¾% later this month, which would largely eliminate the inversion observed in the US Treasury yield curve since the Spring.
US economic data continues to depict a softening manufacturing sector. There has also been a flattening trend in the broadest measure of industrial activity over the past two months. After dropping -0.2% in July, the Federal Reserve’s Total Industrial Production index rebounded 0.8% in August but slipped -0.4% in September. Perhaps more illustrative, the year over year change in September was -.01%. The Fed noted in its September press release that the General Motors strike had negatively impacted the latest figures.1
Capacity Utilization dropped -0.4% in September to a level that is 3% below the long term average of just over 78%2. This number reflects the manufacturing sector slowdown evident in narrower studies but also points to the absence of production bottlenecks that could increase inflationary pressures when manufacturing activity resumes growth.
These indexes portray a short term economic scenario negatively influenced by tariffs, reduced trade flows and a major strike (that has reached a tentative settlement). There are other representative statistical and sentiment indexes that also indicate softening growth, but on the other hand, for example, unfilled orders for durable goods, an important indicator of business and consumer sentiment, remain in an uptrend.3 The overall condition of the US economy early in the fourth quarter is relatively strong compared to the rest of the world but clearly slowing from peak rates of expansion during late 2018 and earlier this year.
We never try to predict moves by the equity or bond markets and the same admonition holds true for the US economy. The well-publicized set of negative statistics over the past 2-3 months should not be accepted as predictive. Jobs and job creation remain firm and wage growth solid in the latest Employment report.4 Absent an increase in layoffs or a significant slowdown in hiring, mixed signals from the last several months should not be extrapolated to predict further deterioration.
As has been the case through much of the summer, political tensions and turmoil are never far from investors’ view.
In the UK, a new Withdrawal Agreement (WA) has been drafted by EU and UK negotiators. Nigel Farage, leader of The Brexit Party stated in response to the WA’s latest iteration that, “…this is not Brexit, this is not what we voted for and this is not good enough.”5 Mr. Farage suggests that Brexit under the proposed terms leaves the EU with veto power over UK legislating and will preclude new bilateral agreements with trading partners such as the US. PM Johnson’s public statements remain consistent that “deal or no deal,” Brexit will occur on October 31.
Saturday October 19, the House of Commons voted to direct the Prime Minister to request an additional three month Brexit delay without voting on the WA. A synopsis of Saturday’s complicated maneuvering is that Parliament attempted and failed to pass required implementation legislation before adoption of the WA. The UK’s WA terms must exactly match the EU version to become an international treaty, so adoption of a properly formatted agreement is the essential first step. This “cart before the horse” sequence has created doubt that the October 31 withdrawal date will be met. The UK Parliament’s decision last month to prohibit a no-deal withdrawal remains the greatest impediment to Brexit.
Trade conflict between the US and China abated somewhat last week. The US announced that pending US tariffs will not be imposed, accompanied by a Chinese pledge to increase US agricultural purchases. No specifics of the purchases have been offered to date however, which suggests that these developments are intended to diffuse tension rather than to outline the structure of a permanent, comprehensive agreement.
In the US, economic news is being overshadowed by impeachment hearings. Speaker Pelosi has transferred the inquiry from the House Judiciary Committee, which has conducted all past impeachment inquiries, to the Intelligence Committee. The process has been characterized, so far, by closed door hearings and partial testimony leaks.6
A new wrinkle is polls showing emerging majority support for impeachment. Is the public turning against the Administration? As Mark Twain once quipped, “There are lies, damned lies, and statistics.”
Two statistical constructs may be delivering suspect results. First, a recent Gallup poll found that 89% of Democrats favor impeachment but only 6% of Republicans.7 Fair enough, but if Democrats were “oversampled” in polls on impeachment, i.e., if the composition of responses reflected a higher percentage of Democrats than present in the electorate, the poll would be skewed.
Second, a Pew Research poll released late last week concluded that 54% of the nation favors impeachment.8 Certainly, a distressing result for the President. But a look inside the poll finds the number of Democrat responses included in the results exceeded Republican answers by 16%.9
Traditionally, Democrats have held a roughly 6% edge in voter registrations over Republicans, which suggests that the Pew poll is overweighting Democrat opinion. Its validity as a true representation of public opinion is therefore questionable.10 Oversampling Democrats has been evident in several impeachment surveys based on examination of recent releases, reinforcing the fact that polling is subjective to the extent that pollsters assign weights to party affiliations (including Independents) in their sample targets that may not reflect actual distribution in the electorate.
The failure of equity and bond prices to respond to what appears to be disastrous news for the President suggests that polls reporting majority support for removal of Mr. Trump are being discounted by investors. A better word might be, “ignored.” The unanswered question surrounding impeachment is, “Why now, 13 months before an election?”
We don’t expect political combat to diminish over the next year but focusing on a long view will help investors maintain the discipline needed to effectively digest coming political developments.
1 “Industrial Production and Capacity Utilization,” www.federalreserve.gov, October 17, 2019.
3 “Monthly Full Report on Manufacturers’ Shipments, Inventories and Orders, August 2019.” www.census.gov, October 3, 2019.
4“Employment Situation Summary,” www.bls.gov, October 4, 2019.
5 Nigel Farage, oral statement, streamed on www.twitter.com, @nigelfarage, October 18, 2019.
6 “The Closed-Door Impeachment,” www.theatlantic.com, October 19, 2019.
7 “Congress Approval, Support for Impeaching Trump Both Up,” www.gallup.com, October 16, 2019.
8 “Modest Changes in Views of Impeachment Proceedings Since Early September,” www.people-press.org, October 17, 2019.
10 “Latest Fake ‘Impeachment Poll’ Is Slammed for Its Bias,” www.lifezette.com, October 19, 2019.
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