TRADE WAR TRICKS AND TREATS
Oct 9th-10th Dow Futures. Click for larger image
Markets were once again roiled by the US / China trade dispute and weak economic data in October, with the S&P 500 dropping 4.3% in the first 3 trading days of the month on the first contractionary reading for US manufacturing since 2015 and the largest annual S&P 500 earnings decline since 2016. Amid conflicting and in some cases, outright false trade war headlines (see chart at left), the VIX index continued its post-2018 pattern of erratic chop in the 18-20 transition zone before eventually settling back into the bull market zone in the back half of the month after a “deal to make a deal” on trade was reached.
A perfect microcosm of the year, once again the S&P 500 managed to come out of the turmoil unscathed and TCM strategies performed according to their aggressiveness with defensive positions. With the most defensive posture, Alpha Seeker slipped -1.2% on the month while Smart Index (+1.5%) and Legacy Navigator (+1.4%) were buoyed by their index exposures to end up broadly in line with the market. After its best day of the year on Nov 1, Alpha Seeker has now closed the October gap and is well-positioned to benefit from continued time the bull market zone.
NY Fed Recession Probability. Click for larger image.
This year’s higher prices on lower earnings mean that risks in the stock market have become more skewed. With equity valuations near their 1929 peak and second only to the “dot com” bubble, a move higher for stocks now requires either a sudden improvement in fundamentals or substantial support from the Fed, while a re-rating lower could be substantial and might be set off by any of a number of catalysts, or none at all. With stocks “priced for perfection” and the risk of a recession on the rise (see chart above), now is the time to think beyond passive index exposures.