Your October Monthly Market Commentary
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With the holidays right around the corner, the market continues to move upwards in the face of major geopolitical headlines and seemingly endless predictions of the next great downturn. October included some major news on stories we have been tracking for several months along with some new updates as companies announced earnings. As you recover from the sugar high after eating all of your kids’ candy (maybe that’s just me…), sit back and catch up on some highlights from October.
Combinations of Tricks and Treats on the Political Front
Geopolitical headlines continue to influence markets and October delivered a combination of progress and ongoing challenges. On one hand, the tension between the United States and China seems to be at its lowest level in well over a year. Political infighting in the United States and the United Kingdom seems to impact both economies. Here are some major stories and potential implications on the geopolitical front:
• Let’s make a deal. Tension between the U.S. and China seems to be lower after President Trump announced in early October that the two sides intended to implement a phased trade deal . The announcement came with limited details, but recent reports have stated that the negotiations are ahead of schedule. Next month’s international summit in Chile was cancelled because of protests (unrelated to the trade deal), so economists are monitoring the timing and location of a new meeting between President Trump and President Xi.
• Politics as usual. There is bipartisan support for two key measures that directly impact the economy and financial services industry—the United States-Mexico-Canada Agreement (USMCA) and the SECURE Act . As mentioned last month, the trade agreement between two of the United States’ three largest trade partners is still stuck in the House. Meanwhile, the SECURE Act (also known as the Setting Every Community Up for Retirement Enhancement Act), seen by many as the biggest improvement to the employer retirement plan space in over a decade, is still stuck in the Senate. Some critics argue that the attention of the impeachment efforts might delay important measures such as these, while others argue that the optics of continuing legislation may help these types of measures pass sooner rather than later. Only time will tell which side is correct.
• Brexit, Brexit, Brexit. The initial referendum was held over three years ago, with 52% of voters opting to leave the European Union. Brexit was supposed to occur earlier this year but has been delayed several times amid constant uncertainty. After a revised deal did not pass Parliament, Prime Minister Johnson called for an early election in December in hopes to win more seats that might make a Brexit deal easier to pass.
Keep an eye on…
• The details of the potential trade deal with China. Progress in this ongoing trade war is typically positive, but it is important to keep in mind that the devil is in the details. High-level reports on Phase 1 show that it includes agriculture purchases, limited intellectual property protections, and components related to financial services. Progress is always exciting, but market watchers will likely pay close attention to enforcement and other sticky issues before judging if the phased approach represents progress.
• Progress in Congress. As more attention continues to be placed on impeachment efforts, many will be keeping an eye on how this impacts major legislative efforts. Some of these efforts, such as the USMCA or SECURE Act, could impact trade, retirement planning, and the overall economy, which could therefore impact the market.
• A deal in the United Kingdom. If Prime Minister Johnson gets an early election and wins additional seats, there could be a higher likelihood of passing a deal to leave the European Union. If the United Kingdom leaves the European Union without a deal, some pundits predict it could lead to a recession or at the very least impact transportation, currency, and borrowing.
More Action from the Fed
For the third time this year, the Fed cut the federal funds rate by 0.25% or 25 basis points. Investors widely expected the move, and much of the focus seemed to be on any sign of future rate cuts. Based on the statement by the Fed, the board will rely heavily on the data and many investors see this as a sign that they may pause rate cuts. The data leading up to this decision was mixed. The labor market, as measured by the unemployment rate, remains strong. Inflation, as measured by the core personal consumption expenditures , remains below 2%. Business investments, as measured by structure spending , decreased in the third quarter of this year. In his statement, Chairman Powell described other downsides, like trade and geopolitical risks, such as the ones described above.
Keep an eye on…
• Being strategic with your cash. As interest rates decrease, the rates on high yield savings or checking and savings accounts are decreasing. Consumers notice this change, but seem to ignore the fact that 70% of Americans have their cash parked in old school accounts that are not paying competitive interest. Every bucket of money should have a purpose. Ideally, people have enough cash on hand to cover short-term expenses or to prepare for emergencies. You might wish to evaluate this amount and make sure you are not holding too much or too little cash for your needs.
• Re-evaluating your debt. As interest rates have decreased, interest rates on debt have also decreased. This is not always a one-to-one relationship, but in general it is cheaper to borrow money today than it was a year ago. Refinancing your debt can be a powerful tool to reduce the amount of interest you pay which may allow you to pay off debt quicker or reduce payments to open room in your budget to save for other goals. Not everyone will pay lower rates because underwriting rules still apply, but it is likely worth exploring how the changing interest rate environment impacts your unique situation.
Major News from a Variety of Companies
Outside of the macro-events described above, there were plenty of major headlines from specific companies. Here are a handful that drew plenty of attention.
• WeWork. The last several months have brought plenty of attention to the company’s leadership and valuation. After multiple IPO delays and leadership changes, SoftBank took a greater ownership stake in the company as its valuation dropped from roughly $47 billion to $8 billion. It is worth paying attention to these types of stories as focus shifts from growth at all costs to having a realistic and shorter-term path to profitability.
• Boeing. Over the last several months, Boeing seems to make headlines for all the wrong reasons. Besides continuing trouble following two crashes of their newest plane, Boeing missed earnings expectations by a fairly large margin in October. While we focus on the financial implications of major headlines, it is important to keep in mind that, in this instance, much of this news relates to corporate governance and loss of hundreds of lives along the way.
• Beyond Meat. The company beat estimates, signed new partners, and turned a profit, but experienced a decrease in stock price. Some finance pros suggest that the expiration of the lockup period and subsequent stock price decline could spell short-term trouble for other companies that recently went public.
• Amazon. Amazon announced earnings and guidance last month which led to disappointment surrounding earnings per share and future revenue. This drove their stock price lower and placed greater attention on how the company performs during the anticipated holiday season.
The More You Know
Back in 2008, legendary investor Warren Buffett threw down the gauntlet to the hedge fund industry. He bet that after fees and expenses, a basic S&P 500 index fund would outperform a selected group of hedge funds over the next decade. That bet was accepted and over the course of the next nine years, the index fund significantly outperformed the hedge funds selected by Protégé Partners LLC who took the other side of the bet. The proceeds all went to charity after the losing party conceded defeat before the ten years was over. The moral of the story here is two-fold—sometimes boring works and fees can have a major impact on growth.
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