The U.S.
Poor manufacturing data from the Institute of Supply Management (ISM) sent markets down last Monday morning — or at least, that was the excuse for October market pessimism, in a month which is historically the year’s most volatile.
We agree with the analysts — especially the inestimable Tony Dwyer of Canaccord Genuity, Inc. — who view the current industrial data as indicative of a slowdown in the expansion similar to those experienced in 2012 and 2015–2016.
We do not yet believe that current data are converging to suggest an imminent recession and an end to the post-2009 bull market. On the contrary, the critical data remain positive. The two- to ten-year Treasury yield curve inverted in August, starting the clock on an eventual recession — the key word being “eventual.” Though there is wide variability in the data, on average, inversion precedes a market top by nearly two years, with market appreciation of more than 20% in that time. Financial conditions remain unconstrained — there is no significant financial stress in evidence in the United States that would shut down access to credit. Inflation remains quiescent, and the U.S. central bank remains accommodative.
There is political turmoil on many fronts, both in the U.S. and abroad, and both legacy news and social media are providing an endless litany of reasons to be afraid of the world and of our neighbors who may look and think differently than we do. A recent analysis in The Wall Street Journal showed in stark terms how polarized Americans have become over the past two decades, both politically and culturally (you can read it here). Increasingly the warring camps in America seem not just to have little to say to each other, but to inhabit different worlds. In these conditions it is more important than ever for investors to commit themselves to just looking at the data — and not get caught up in the swirl of opinion and panic.
Europe and China
Europe and China both remain sources of potentially disruptive events — Brexit drama in the case of Europe, ongoing protests and instability in Hong Kong in the case of China. (Not to mention the constant back-and-forth drama of trade negotiations between the U.S. and China.)
If Brexit really happens on October 31, and the UK market and the pound experience volatility or sharp declines, that will likely be a buying opportunity; we are optimistic about the UK’s longer-term prospects outside the EU.
We still believe that both the U.S. and China are, for different reasons, incentivized to make a trade deal — or at least, enough of the appearance of a trade deal that they can sell it to their respective populations as a victory. We do not know the timeline, of course; we’ll be watching closely after China’s 70th anniversary celebrations to see if, with that having gone smoothly, there are signs of a new willingness for compromise.
Gold and Cryptos
Gold has corrected, in part due to rising dollar strength. We believe that the medium- and longer-term bull case for gold remains intact. Throughout 2019, gold has been closely correlated to the world’s total amount of outstanding negative-yielding debt, and with interest rates having risen somewhat in Europe, that correlation seems to be continuing. We do not yet see signs of a sustainable global trend of rising interest rates; we see many potential sources of economic and financial volatility; and we see many central banks continuing to accumulate gold. For all these reasons, we remain medium- and longer-term bullish on gold.
As noted above, in spite of likely tremors, we do not regard Alphabet’s quantum computing coup as an immediate threat to the integrity of Bitcoin and other cryptocurrencies. Without significant catalysts, Bitcoin remains in a trading range.
Thanks for listening; we welcome your calls and questions.
Did you miss our quarterly conference call on September 26, in which we discussed strategies for income investing in a very low interest rate environment, as well as current events and trends and the ongoing bull case for gold? Click here to listen to the replay.
