Market Brief - Oct 29th, 2018

Erica Szczech - Nov 19, 2018
October came in with a roar and is going out with a fizzle.The downward trend of markets over the past three weeks has been quick and some may say hasty, and based on Friday’s tech giant earnings, we may see a bit more before the calendar rolls over.

October came in with a roar and is going out with a fizzle. The
downward trend of markets over the past three weeks has been quick
and some may say hasty, and based on Friday’s tech giant earnings, we
may see a bit more before the calendar rolls over to November later
this week. However, we were anticipating some type of correction to
relieve the excesses that were apparent in September and it happened
to come sooner rather than later. Like other market pullbacks, they are
the result of an excessive market – but what makes this one different?


Earlier this month, Fed Chair Jerome Powell gave a speech and said
that not only was the Fed going to keep hiking rates for some time, he
also said that they would go well above the neutral rate, and that has
been re-iterated by several Fed Governors. We don’t think the market
was expecting these hawkish comments, especially since we haven’t
heard anything like this for the past least 10 years.


When a correction is triggered by a rate shock, history shows it is
usually the growth/momentum trades which get hurt. That’s not to say
we would sell; the factors that would cause us to sell a stock in any
situation remain the same – something has changed with the
underlying fundamentals or the long-term growth aspects of the
company. Since we don’t see either of these happening, we would be
inclined to stick to our investment strategy and scale into this market
dip and start our rotation to value. After a long bull market, it would be
unusual to end without a value cycle and this correction is finally
allowing for a rotation out of growth into value.


Interest rate increases are not the only reason for what’s going on in
the markets. Tariffs are coming up in more U.S. CEO conversations. In
China, most investors attribute market weakness to the tariff war but
significant changes to regulations since the spring have become
extremely restrictive. They include approvals of new video games, after
school education regulations and the pharmaceutical industry where
the government wants to cut drug prices by 40%, which has slammed
the Chinese drug sector. There are many other new regulations which
are making China struggle, but as they struggle, the US has seen tax
cuts and regulatory easement.

All these factors mean we are still looking for an answer as to when the
pullback might end. To do that, we must broaden our thinking and look
to what the remaining catalysts are:


Tony Dwyer, our Chief US Strategist said Friday there are still three
outstanding issues which are not close to resolution:


1. The US mid-term election isn’t until November 6th,
2. President Trump has put the Fed in a no-win situation – which is
potentially why all the posturing from Jerome Powell, and
3. The threat of trade war escalation with China and the important
impact on forward growth expectations.


Not mentioned is his last factor, 4. When the market gets oversold
enough, the selling usually stops. And judging from the Futures, his
indicators will be approaching extreme oversold territory. The likelihood
of a bounce in the coming weeks/months is very real.


While we don’t know how long this downturn is going to last, we have
approached the last few weeks armed with our investment approach
and long-term thinking. We will continue to ride it out a bit longer.


Thank you to everyone who attended our Annul Real Estate Event last
week featuring four unique real estate holdings - it was another
successful evening.


Enjoy Halloween if you have little Trick-or-Treaters or are out celebrating
and stay safe.


All the best,
Erica Szczech