October did not disappoint for stock market investors as, once again, both domestic and international indices were higher for the month. Bonds continued to impress with the Aggregate Bond Index up 0.33% for the month. Commodities were strong as the US dollar index fell more than 2% as the first part of a US-China trade deal is expected to be signed as early as this month.
U.S. & International Stock Index Returns
|Index November 2019 Year-to-Date|
|Dow Industrials 4.29% 20.25%|
|S&P 500 4.13% 25.30%|
|S&P 400 (Midcap) 3.29% 20.87%|
|S&P 600 (Small Cap) 3.33% 17.58%|
|MSCI World 3.12% 21.68%|
|MSCI EAFE 1.10% 14.80%|
|Bloomberg Agg. Bond 8.79%|
|CRB Commodity Index 4.04%|
|US Dollar Index 1.14%|
All data as of 12/01/2019, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
The strong gains for investors continued on in November as all the US Equity indices we follow were markedly higher. Global stocks rose modestly. If the trend continues 2019 will go on record as one of the best years of the bull market that started in 2009.
The S&P 500 (Chart #1) spent most of the month posting new all-time highs, closing well above the 3100 level. This was not our base-case scenario when we entered 2019. Yet, we are not surprised to see these strong gains either. The current combination of lower interest rates and positive investor sentiment can be a potent stimulus.
The 10-year Treasury posted a mid-month “higher high” before pulling back to end the month yielding 1.77%. Our base-case scenario for the short term is higher yields. How high could they go? Given the low global rate environment – many developed country sovereign bonds have negative yields – we would be shocked if yields rose above 2.5%.
The US Dollar Index did trend higher in November, stalling out around the 98.2 level. While higher than the previous month close, there is nothing on the chart that indicates to us a strong trend in either direction. As we have stated a number of times, we believe the dollar index remains in this level as long as the trade war with China continues. A trade deal would, in our opinion, allow the dollar to weaken against other currencies.
The CRB Commodity Index got interesting in November as it broke above the resistance line, tested it mid-month, finishing right at the downtrend line. We are interested to see how commodities react in the final month of the year. Could the re be continued strength for commodities, or just another fake-out-break-out?
We try to keep up with opinions from all sides of the investment world and it is fascinating to hear the diversity of opinion on where we go from here. Read the technical analysts and they are bullish on the stock market. The fundamental folks and economists much more bearish. From our perspective the markets are clearly telling us we are in a risk on environment even as the fundamentals that underly the market is just OK at best.
Where things get interesting is at the start of 2020. Over the years we have noticed that there are times when the market opinion on equities changes drastically with the beginning of a new year. This can be particularly notable coming off a strong year for equities. Apparently, the view on December 31 when you are up 10%, 15%, or more can be much different than the view on January 2 when you are back to 0%.
In our September Market Report we spent a fair amount of time discussing the economy and what we look at when thinking about the possibility of an economic recession. If you missed it, it is worth a read. As investors we are interested in recessions as they hurt corporate earnings, which ultimately negatively affects the stock market. While currently not in a recession, we noted that the trade war with China was starting to hit Corporate America’s bottom line, which will eventually start to limit capital spending along with hiring. Essentially, we argue that if the trade dispute is not resolved soon we are likely headed toward an economic recession.
Bottom line: We still believe the stock market is lining up to have a good finish to an already strong year of market gains.
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Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com