The Weather may be Turning Colder, but not the Market

By Tony Moeller, CPA

Historically, November has been one of the best months for stocks and begins the major averages’ best half-year (November through April) per the Stock Trader’s Almanac.

Currently, the two biggest headwinds facing investors are the impeachment hearings and trade negotiations with China. The market has shrugged off the impeachment hearings, while there is more anxiety associated with a China trade deal. The Federal Reserve is not intent on further interest rate decreases, unless it sees a slowdown and/or threats to the economy, in which case it would cut rates to help stabilize the economy.

The holiday season is just around the corner and thoughts will soon be turning to family gatherings and festivities. All the while, a recession does not seem to be on the horizon and the bull market will surely encounter some volatility in the coming months. However, the lack of irrational exuberance is a positive signal for the stock market, since there is plenty of cash of the sidelines (in less appealing savings accounts as rates have declined) to take advantage of any short-term setbacks/buying opportunities.

Unloved, Shunned, but Still on a Run

This is the ongoing narrative of the long running bull market. Even though 2019 has been a good year globally for stocks, the following chart shows investors have been hesitant to participate in the stock market.

In the third quarter of this year, investors moved more money out of stock funds in a quarter since 2009, according to Morningstar data on U.S. mutual funds and exchange traded funds.

This is quite ironic considering some of the following facts:

• With more than 90% of S&P 500 companies having reported third-quarter earnings, about three-quarters have beaten expectations, slightly above the five-year average of 72%, according to FactSet.

• The amount of global bonds with negative yields has shrunk by almost a third to $11.9 trillion from $17 trillion in late summer.

• The U.S. unemployment rate in October ticked up from a 50-year to 3.60%. As Federal Reserve Vice Chairman Richard Clarida noted in a speech earlier this month, “The U.S. economy is in a good place…growth has been supported by continued strength of household consumption, underpinned, in turn, by a thriving labor market.” Bottom line, more people are working and spending money, which is supportive of the economy and stock market.

• The Feds lowering of interest rates has been a boost for the housing market. The average 30-year mortgage rate has fallen to 3.75% compared to 5.20% last November. As such, sales of newly constructed homes are up more than 7% for the first nine months of this year, and lenders extended $700 billion of home loans for the same period, which is the most in 14 years, according to industry research group Inside Mortgage Finance.

• Mortgage refinancing activity jumped 75% from a year earlier in July and August, according to data and technology firm Black Knight Inc. This is resulting in a cost saving to home owners who are redirecting some of that savings to spending, which supports the strong consumer spending we’ve seen.

In spite of this positive news, anxious investors have set aside $3.4 trillion in cash. Along this line, assets in money-market funds have grown by $1 trillion over the last three years to their highest level in around a decade, according to Lipper data.

Along this line, 55% of wealthy investors conducted by USB Global Management survey between August and October of this year are expecting a “significant drop” in financial markets before the end of 2020, which coincides with the record outflows from stocks during the same period. 

Yet some analysts said the heap of cash shows that investors haven’t grown excessively exuberant despite markets’ double-digit gains this year and have plenty of money available to buy when lower prices prevail. That is a comforting message to those concerned about an economic slowdown yet wary of betting against a market that has punished doubters during its 10-year run.

Analysts at Bank of America Merrill Lynch, meanwhile, see the cash pile as an indication that markets have plenty of room for more gains. The bank’s proprietary Cash Rule Indicator, which gives a buy signal on stocks when investors’ cash balances are above their long-term averages, has been in bullish territory for the last 20 months.

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The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any investment or strategy. A risk of loss is involved with investments in the stock and bond markets