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IWM Monthly Commentary – November 2018

Monthly Market Summary

Volatility shuddered markets for much of November as concerns of rising interest rates—which had dampened investor enthusiasm through the fall—were lifted by comments from the Federal Reserve Bank which were interpreted as a possible suspension of its previously hawkish monetary policy. Continued strong US economic growth borne by full employment, rising wages and robust consumer spending was shadowed by the potential cost of a Sino-US trade war, the depletion of fuel from this year’s fiscal stimulus in the face of a sluggish housing market and a dour macro-outlook for Europe, Japan and emerging markets.


All three major US stock indexes ended in positive territory in November. The Dow Jones Industrial Average closed the month up 1.6%, the S&P 500 Index(TR) increased 3.15% and the Nasdaq Composite Index advanced 0.3%.

Bears asserted themselves nevertheless. The Wall Street Journal reported that BlackRock expects “stocks and bonds could both finish the year in the red for the first time in at least a quarter-century.” It also noted that “90 percent of the 70 asset classes tracked by Deutsche Bank are posting negative total returns in dollar terms for the year through mid- November.” For good measure, just in case anyone still follows cryptocurrencies, Bitcoin fell below $4,000, down about 80 percent from its high of nearly $20,000 a year ago.

Jeffrey Gundlach told investors in a telephone interview to focus on capital preservation and avoid corporate bonds and Treasuries as inflationary pressures intensify. The DoubleLine Capital CEO said investors have not shown an appetite for Treasuries even as US markets plummeted. “There’s no bond rally,” he commented.

The Treasury’s auction of $19 billion of 30-year bonds received the weakest demand since 2009, as investors demanded higher yields before diving into a deluge of new US government debt. Bidding was weak even as the 30-year bond yield hovered around 3.4%, near the four-year high. Credit markets are heading for the worst year since the global financial crisis.

High-yield and investment-grade notes were prepared for losses in both euros and dollars, the first time such assets posted negative total returns since 2008, based on Bloomberg Barclays indexes. European spreads staged their biggest weekly jump in almost seven
years as euro high-yield spreads widened, while dollar investment-grade spreads reached two-year highs.

Some perceived a silver lining among the gloom, at least on the equity side. Bloomberg concluded that bearish sentiment was low enough to signal stock market bottoms. In the S&P 500 Index, for example, 41% of the stocks are down over 20% from their most recent 52-week high and another 31% are down between 10-20% from their 52-week high.

“There hasn’t been a narrower range for a full year since 2005, when the spread was 11.9 percent,” Bloomberg reported, an observation that inspired Horan Capital Advisers to suggest that this “may be the necessary recipe for an equity market rebound.”

Similarly, ZeroHedge, in its analysis of Goldman Sachs’ “Bear Market Risk Indicator” pronounced the prospect of a bear market “has almost never been greater” and encouraged investors to exploit market weakness as a buying opportunity.

US Economy

Amid volatile financial markets, rising wages and docile inflation, Fed Chairman Jerome Powell hinted a less hawkish monetary policy next year. It was unclear, however, if he was inclined to nudge rates above neutral, as he had earlier suggested, or if he anticipates fewer rate hikes or even a pause.

In its second estimate of third quarter GDP, the Bureau of Economic Analysis confirmed that the US economy grew at an annualized rate of 3.5%, in line with both expectations and the first estimate released a month ago. Economists cited tariff-related uncertainty, cooling global demand, rising borrowing costs and plunging oil prices as economic headwinds while at the same time noting that the boost from lower taxes is projected to
fade next year. A politically divided Congress, especially in today’s tense environment, is unlikely to add any additional stimulus.

ImpactECON, a consulting firm associated with Koch Industries—who has argued against the Trump administration’s protectionist trade policies from the outset—estimated that US-led trade conflicts could cost Americans $915 each, or $2,400 per household, in the form of higher prices, lower wages and lower investment returns in 2019.

Personal income and spending data in October and November rose 0.5% and 0.6%, respectively, on a month-to-month basis, the biggest monthly spike in 2018, after slowing in September. With spending continuing to outpace income, personal savings data fell to 6.2% in October, its lowest level since December 2017.

The Fed reported that total consumer credit in September rose to $4.0 trillion, rising $10.9 billion in the month and missing expectations of a $15 billion increase. However, the value  of student loans outstanding and auto debt set record highs at $1.56 trillion and $1.14 trillion respectively, allying concerns that consumers have lost their appetite for debt.

The latest Senior Loan Officer Survey from the Fed revealed falling demand for residential mortgages, following recent quarters of declines. The survey pointed out that in the past, declines in residential investment were followed by recessions. In a related development, the average interest rate for 30-year fixed-rate mortgages with a 20% down-payment rose to 5.17% for the latest reporting week, according to the Mortgage Bankers Association – the highest average rate since September 2009.

US Industrial Production growth slowed again in October by 0.1% MoM, well below expectations and thanks in part to hurricanes that disrupted industrial production. Yearover- year growth in industrial production slowed from 5.6% to 4.1%. Sales of durable goods, meanwhile, plunged in October by 4.4% MoM versus expectations of a 2.6% decline, due in large part to a 59.3% MoM collapse in defense aircraft spending.

General Motors again made headlines when announced it would cut production of slowselling models and slash its North American workforce because of a declining market for traditional gas-powered sedans, shifting more investment to electric and autonomous vehicles. The move represented the biggest restructuring for the top American carmaker since its bankruptcy a decade ago and marked a turning point for the North American auto industry.

The National Federation of Independent Business’ Small Business Optimism Index reached a strong 107.4, down 1.4 points from the Index’s 45-year August high. The group reported that small businesses “added significant numbers of new workers to the employment pool” as members “believe the current period is a good time to expand  substantially.”

The Conference Board Consumer Confidence Index® declined in November to 135.7, down from 137.9 in October. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—improved slightly, from 171.9 to 172.7 while the Expectations Index—based on consumers’ short-term outlook for income, business and labor market conditions—decreased to 111.0.

October’s final University of Michigan consumer sentiment index slipped from September’s levels with current conditions and expectations both declining. In particular, respondents expressed concerns over the prospects for continued interest rate increases.


The International Monetary Fund, in addition to the Fed, JPMorgan and others, sounded the alarm over leveraged loans as excessively speculative instruments. The $1.3 trillion global leverage loans market involves loans, usually arranged by a syndicate of banks, to companies that are heavily indebted or have weak credit ratings. They are “leveraged” because the ratio of the borrower’s debt to assets or earnings significantly exceeds
industry norms and may collapse as global growth slows and tighter financial conditions bite.

Speaking of which, Goldman Sachs issued a note arguing that fiscal policy will emerge as a key support for growth as other governments follow the US’ lead in fiscal largess. “Looking ahead to 2019, we expect a similar contribution of fiscal growth as in 2018, but the composition shifts from being US-centric to being more broadly based across developed and emerging markets,” Goldman wrote.

Weaker exports were the primary driver behind Germany’s first quarterly economic contraction since 2015, according to the Federal Statistics Office, which confirmed a preliminary negative reading of 0.2% in Q3. In addition, flash PMI figures from IHS Markit showed Germany’s manufacturing output slipping to a 67-month low amid a broader eurozone economic slowdown.

Italian deputy premier Luigi Di Maio declared after a cabinet meeting that the country’s most recent draft budget “is the budget the country needs to start up again,” though Rome could risk a fine from the austerity-minded European Union totaling 0.2% of Italy’s annual GDP and the freezing of some funding. The euro came under pressure on the news, while Italian debt sold off.

In the Far East, Japan’s central bank has become the first among G7 nations to own assets collectively worth more than the country’s entire economy, following a half-decade spending spree designed to accelerate weak price growth. The 553.6 trillion yen ($4.87 trillion) of assets the Bank of Japan holds are worth more than five times Apple Inc., the world’s most valuable company and 25 times the market capitalization of Japan’s most valuable company, Toyota Motor Corporation.

The Japanese economy, meanwhile, contracted an annualized 1.2% in Q3, lashed by strong typhoons and a powerful earthquake that halted factories and stifled consumption. Exports also slowed, suggesting trade protectionism is starting to take its toll on overseas

If these waters sound difficult to navigate, it’s because they are. Markets are much more volatile than they were in 2017—though 2018 is much more normal, historically speaking, than 2017 was—and geopolitical tensions continue to impact investment decisions. Nevertheless investors across the globe, including the team here at IWM, are keeping a watchful eye on these and other developments.

Of particular focus is the Fed’s upcoming policy meeting on December 19th—now just a couple of weeks away. We anticipate another 25bps rate hike, in addition to more clarity surrounding monetary policy going into 2019. As always, we are always looking for opportunities to maximize value for you, our trusted and valued clients.


David Young, CFA®
Chief Investment Officer, IWM, LLC
Brent Pine, CFP®, CPA
President & CEO, IWM, LLC
(480) 663-6000 (p)
(480) 663-6033 (f)
4800 N. Scottsdale Road, Suite 1900
Scottsdale, AZ 85251


*David Young is not affiliated with Geneos Wealth Management, Inc.

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