Markets continues to have a rough fall to date, actually touching what would be considered a “bear market”. From a seasonal point of view however, we also begin to see the fall rally. Historically the best six moths of the year for the stock market begin October 28th. And incidentally markets touched that recent bottom here on October 26th and are quickly bouncing and look to be moving higher. We have accordingly moved from defense to more offense. Is this the beginning of the rally, we consider so.
To ensure this is not a false flag, we do still hold some cash. And we have some gold also, which is currently working well as a safe haven. Should however markets hold, we expect to further reduce the cash exposure and be fully invested in stocks shortly. We are still somewhat cautious as we are in the Yellow Zone, but quickly moving into the Green Zone on a shorter-term basis. Should the current move higher see the expected follow through, will also likely move into the Green Zones on a mid to longer term basis too.
First off, as stated above, we are moving into the period of the year where we typically see a fall rally and into the best six months of the investing year. And with a follow through of company earnings announcements having been mostly positive for the quarter, many gear up happily for the holiday season.
The most important concern for the markets has been inflation and rates. The Bank of Canada had already ceased raising rates and most expectations are, there will not be any further changes until mid to late next year. And the likelihood is increasingly regarded to be a drop in rates rather than further increases. Especially as the Canadian economy has already been slower than the U.S.
In the U.S., the Fed announced this week they also would not be increasing rates. Any further changes would continue to be “data dependent”. The Fed did not imply that they no longer have a tightening bias but did drop some hints that the central bank may be at the peak of its aggressive tightening campaign. Global markets cheered. Bond rates in the market immediately eased, stocks bounced higher and since have been risk on. Bank stocks too have responded well and bounced up nicely and are looking attractive for the first time since the beginning of 2022. We have added some exposure to them.
Here are the comments from BMO Economics:
The FOMC left policy rates unchanged today, as was broadly expected. The target range for the fed funds rate remains at 5.25%-to-5.50%. In the statement, “strong” replaced “solid” in describing current economic activity, a meaningful upgrade, but this was countered by the mention of both “tighter financial and credit conditions” as weighing on future economic activity. Before, only tighter credit conditions was mentioned, in a new nod to higher bond yields.
Elsewhere, September’s forward guidance was repeated (which had been in place for the prior three meetings). It says: “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” As we’ve mentioned before, the “may be appropriate” phrase affords the Fed a lot of flexibility. It fit July’s hike, along with September’s and November’s skips and, thus, it can accommodate the possibility of either action at the next meeting.
In the presser, Chair Powell’s opening comments sounded like his remarks made a couple of weeks ago, so no new insights. In the Q&A, in discussing the policy implications of higher bond yields, he said that two things matter. First, whether the move is proving to be persistent and, second, whether the move reflects higher term premiums and not market expectations for ‘higher-for-longer’ policy rates (he judges it is more term premiums).
Bottom Line: The Fed served few clues about potential policy actions on December 13 or January 31. In the presser, Powell even avoided saying the Fed had a formal “tightening bias”. In its self-described meeting-by-meeting approach, the Committee will assess whether it has achieved sufficiently restrictive monetary policy. The Fed judges it’s not there yet, but financial conditions are working to steer them in that direction. We'll see where this lands by mid-December, after a couple iterations of key data.
And lastly the geopolitical outlook. Russia and Ukraine are at a standstill and could be for some time, as neither side is willing to compromise. The following comments come courtesy of Greg Valliere, Chief U.S. Policy Strategist, AGF Investments:
“There will most likely be no deep and beautiful breakthrough,” said Gen. Valery Zaluzhnyy the commander-in-chief of Ukraine’s armed forces, in an interview published Wednesday. His comments stirred quite a buzz in Washington, where Congress is debating more aid for Kyiv… THE LIKELIHOOD OF A PROLONGED STALEMATE, lasting at least into next spring, has prompted speculation in both countries about a truce that would return much of battered eastern Ukraine to Kyiv. But there’s no consensus on the prize — Crimea — which eventually may have to be partitioned, like North and South Korea. (Click here for full article)
The awful war in the middle east between Israel and Hamas also appears to be somewhat slowing in the past few days. Also rhetoric out of China has lessened recently, as the growth in their economy is not as strong as needed and as they recognize they are somewhat dependent on the west for that growth.
As devastating as the war situations are, and though they cause uncertainty which leads to volatility, neither of these circumstances is causing any major impact to the markets. And as they slow, and as China is somewhat quiet of late, these are becoming less of an issue for investors (only from an investing standpoint of course).
From a technical view, besides entering the seasonally attractive time of the year, and that we are also in the third year of the U.S. presidency which also historically ends well, markets bounced nicely off their recent bottom, just below where we would have expected them to do so. Going close to that bottom, we had taken risk off the table in case the bottom failed. But it held well and is seeing us get reinvested. And to get really technical, markets have also tracked back successfully into the longer-term upward channel going back to the fall of last year.
Seasonally we are now entering in the “sweet spot” of the year and markets have bounced successfully off their bottom where they needed to. The fundamentals: namely inflation is beginning to slow, even decline, rates appear to have topped out and geopolitical issues are less of a factor of late. Together these spell out a positive atmosphere potential for stocks through to the end of the year. We are still in the Yellow Zone, so we are holding over 20% in cash and gold as a safe haven but expect that we are moving into the Green Zone and look to be fully invested as this rally takes hold.
Thank you