October. It was the worst of times, it was the best of times. But I’m NOT referring to the Kansas City Royals making it to Game 7 of the World Series (the best of times), leaving the tying run stranded on third base with two outs in the bottom of the 9th inning (the worst of times).
No, in the first half of October, markets couldn’t seem to find a buyer and they plummeted daily on large volume with volatility we haven’t seen in over two years. U.S markets fell 5 ½% in the first half of the month, sending everyone running for cover and prompting “experts” who have been predicting a market crash for the past five years to start their version of “See, I told you so.”
Then in mid-October, markets all over the world bounced. And it was not a Dead Cat Bounce. (No, I am NOT the author of that phrase!) No, markets bounced and kept rising all the way through Election Day. As I write this, the Dow Jones Industrial Average is hitting new highs.
The primary “wild card” the past several months has been the Ebola virus. I have been saying for months that stock markets worldwide would suffer if the Ebola virus was not contained (see Ebola & Uber). Since mid-October, we have hardly even heard the word “Ebola,” and not totally coincidentally, stock markets are hitting new highs.
In the past, October has proven to be rather dicey, and we have experienced some nasty sell-offs. So the nosedive in early October made it seem like we were heading for another bloodbath. But when the markets closed on Halloween, U.S. stock markets finished up over 2% for the month and foreign markets pared their losses to a meager 1% loss.
For the past five years, U.S. stock markets have risen approximately 16% per year! How long can it continue? When will it end? Who knows? But market tops are usually accompanied by some sort of financial calamity. When we hear that a large financial institution might become insolvent, particularly one that specializes in “short-selling,” we will consider becoming much more cautious.
Having said that, I confess that as the market recovered much of its early October loss, we began hedging our portfolios somewhat. In the rear view mirror, hedging was not the correct strategy as markets have continued upward. However, that hasn’t prompted us to “un-hedge.” We still think it prudent to protect the downside.
The Federal Reserve Bank announced it would no longer purchase mortgages and bonds in the open market. The reasons given are that the economy finally has the legs to stand on its own and doesn’t need the stimulus of the Fed holding down interest rates. Curiously enough, interest rates have not reacted at all to this news. The 10-year Treasury is still trading with an interest rate of roughly 2.35%, pretty much an average of where it has been all year.
For years we have been hearing how the Fed’s bond buying program would end in disaster. The fear was that interest rates would rise dramatically when it ended, sending our economy back into a recession. It appears that investors have overestimated the power of the Federal Reserve. The Fed’s bond-buying program wasn’t responsible for holding interest rates down, and we can now see that ending the program is not pushing rates up.
Low interest rates all over the world have been the result of sluggish economies. Other than China (which is slowing), the U.S. has been one of the least sluggish economies.
Not only are we continuing to experience low interest rates, but sluggish economies are causing lower fuel prices as well. A barrel of oil now costs less than $80, down from over $100 a few months ago. The U.S. consumer is seeing the average gallon of gas below $3, which will prove to be more of a stimulus than anything the Fed could have done. Lower gas prices are like a tax cut, giving people more dollars to spend on other consumer goods. This is a very good thing.
Recently, the Saudis cut the price of oil exported to the U.S., but raised prices for other countries. This is because the U.S. is producing oil in North Dakota and surrounding areas. Fracking has led to an entirely new source of energy and the Saudis are attempting to squeeze U.S. producers by lowering the cost of oil they export to the U.S. Good luck. We appreciate it every time we stop to fill up our tanks.
An ugly, nine-year chapter in the history of the U.S. homeowner appears to be just about over. I have included the chart below in many of my Investment Commentaries over the past seven years.
This chart illustrates the number of monthly home foreclosures in the U.S. going back nine years. In 2005, there were less than 100,000 foreclosures each month (less than 1 million annually). At the peak in 2010, there were over 350,000 per month (more than 4 million annually!). As 350,000 households were getting kicked out of their homes each month, housing prices plummeted because banks sought to rid themselves of real estate they didn’t want to own.
Today, foreclosures are almost back to the 2005 level, and home prices have recovered somewhat. Another sign that our economy continues to heal slowly.
Election Day came and went with very few surprises. The Republicans gained the majority in the House and the Senate, and the stock markets yawned.
Maybe there will be some agreement on tax reform. Maybe there will be some agreement on energy policies. And maybe there will be agreement on some tweaks to the Affordable Care Act (Obamacare). However, there will not be any agreement when it comes to repealing the Affordable Care Act. That is Obama’s baby and he will certainly veto any bill attempting to kill it.
Of course, Congress may not need to do anything to repeal Obamacare. Last week the Supreme Court agreed to review a challenge to Obamacare. The challenge has to do with the Act providing subsidies to insured individuals who reside in states that do NOT run their own exchanges. This apparent typographical error in the Affordable Care Act could effectively shut it down and cause millions of people to be uninsured immediately. The Affordable Care Act is 974 pages long. Did they think they could write something that long and that complicated and not have at least one typographical error?
Democratic candidates for the House and Senate tried to distance themselves from Obama and Obamacare during their campaigns. Republican candidates in virtually every race used Obama and Obamacare as a lightning rod against their Democratic opponents. You gotta do what you gotta do to get elected.
With the Ebola virus on the back burner, Boyer & Corporon Wealth Management doesn’t see any reason to run for cover. However, after the stock market has increased 16% per year for the past five years, we don’t see it as a screaming bargain and remain slightly hedged. To the extent we have unrealized losses, we will be realizing them in November.
We continue to reduce our positions in long duration zero-coupon municipal bonds. The big gains have been made in that asset class, and we are liquidating many positions as they become long term.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.