Today, rather than diving into the fundamentals of US equities subsectors, let’s look “under the hood” and focus on what has transpired for the months of October and November.
The S&P 500
The broader S&P 500 has been buffeted over the last several months, moving with higher sustained volatility than usual when compared to the last several years. As uncertainties rose in October, the S&P fell to a loss for 2018. This was reversed in November with the S&P 500 returning to positive territory as strong earnings, a positive election result, muted Iranian sanctions, and resumption in US-China trade dialogue helped calm markets.
A few observations
Earlier, strong quarterly earnings were somewhat shrugged off, with companies that beat expectations rewarded with small rallies, while companies that missed expectations were punished with sharp selloffs. Some uncertainty was removed by the US election that resulted in control of Congress split between the Democrats and Republicans; a largely positive result since President Trump’s economic achievements can’t be undercut while his more questionable moves may be held in check. And elevated oil prices were obliterated after Trump granted waivers to the biggest consumers of Iranian oil when sanctions were reimposed on November 5th (low oil prices are seen as generally beneficial to US companies). Most recently, markets have taken developments in US-China trade talks as a positive after China sent the US a list of proposals to help address US grievances regarding some Chinese trade and business practices (rough Brexit discussions may be the flipside to this positivity for now).
S&P 500 share buybacks are at historic levelsEquity markets by the numbers
Some years ago, companies discovered that share buybacks are a good method for returning money to shareholders by avoiding the double tax hit to dividends. A win-win scenario, right (no sarcasm here)? Third quarter buybacks for S&P 500 companies may have now risen above $200 billion. Read more at Reuters!
This mix of sectors leading performance was (and isn’t) too surprising, largely reflecting areas that have led the most recent bull market and benefit the most from strong domestic consumption, while staying mostly insulated from swirling trade uncertainty.
October
October struck with a vengeance.
Fears rose and the VIX exploded. Treasury yields had been rising relentlessly. Sure, the historic average of 10-year treasury yields is above 5% for the most recent half a century, but the rate at which yields were rising was too far, too fast. Set against the backdrop of relatively weak economic data out of China, global growth concerns began to surface (how could the US equity bull market, alone, continue to rise?).
And oil prices had largely paired September gains – pressuring upstream energy companies – as futures trades were unwound and market participants began to second-guess Trump’s commitment to Iranian sanctions. Political risks were also seen as elevated, with uncertainty swirling about whether the Republicans could maintain control of the legislative branch of the government in November elections.
The US major indexes briefly gave up 2018 gains amid the massive pullback that occurred towards the end of October. By the time November was about to begin, the S&P 500 was barely positive for 2018, and the Technology sector had given back half of 2018 gains.
November
November has been more nuanced so far, with funds flowing between various sectors. Notably, weakness in Communications and Technology - which have lagged the markets so far this month - and strength in Health Care have allowed the latter to take the mantle of best performing sector for 2018.
Oil Markets: The second time is the charm?
What happened
The case for the bull market, which rested primarily on supply constraints resulting from the expectation that US President Trump would follow through on his stated intention to enforce strict sanctions on Iran, imploded after the US granted waivers to the largest importers of Iranian crude oil (India, China, and six others). The day these waivers were granted, oil markets were faced with the uncomfortable reality that crude supply appeared to be outstripping demand as the world’s largest producers – the USA, Russia, and Saudi Arabia – were raising production to historic levels. Oversupply worries re-emerged amid hefty gains in US commercial crude stockpiles week after week, and oil prices collapsed.
Saudi is furious at what they perceive as the old bait-and-switchWhat will happen?
As far back as July, Trump had asked Saudi Arabia to increase oil production to help offset shortages that could occur from strict Iranian oil sanctions. Saudi readily complied, happy to take market share while reducing a major income source for arch-rival Iran. Then Trump relaxed his position on Iranian sanctions, without informing Saudi of his new intentions. Read more about this at Reuters.
Until now, bears have remained in control. But there is still hope for the bulls! At the end of September, traders held a record number of bullish positions for crude oil in the futures and options markets (according to CFTC data). Throughout October, that crowded trade was steadily unwound to the more reasonable place where we find ourselves today.
With the overhang from financial constructs held in check, we can now turn back to the fundamentals and see that Saudi and OPEC are now talking up the possibility of reducing current production by an aggressive 1.5M bpd to help support oil prices (perhaps this reflects Saudi anger at Trump’s Iranian oil waivers). OPEC may be missing its +1, however, since Russia has mentioned several times in recent weeks that additional production cuts may ultimately prove unnecessary once the situation around Iranian sanctions becomes clearer. Potential production weakness from Venezuela, Libya, and Iraq may also lend some pricing support.
Ultimately, the proof is in the pudding, and prices can be reasonably expected to remain subdued while EIA data continues to show strong weekly builds in US commercial crude stockpiles.
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The Ignorant Investor would like to state that when the market goes up and when the market goes down, a savvy investor can always make money. For these uncertain times, it may be best to take a long-term view of what's happening in the equity markets and try to identify bargains when market selloffs appear overdone (the proverbial babies that have been thrown out with the bathwater). Perhaps that stock you've always wanted to own may now be quite appealing on a two to five year investment horizon.
