Volatility returned with a vengeance in October as the market experienced the biggest monthly selloff since 2011 with the Dow Jones Industrial Average, S&P 500 Index, and NASDAQ Composite falling 5.7 percent, 6.7 percent, and 9.2 percent, respectively from their all-time closing highs. In just two days, October 10th – 11th, the Dow lost 1377 points, or 5.2 percent.

There was no shortage of reasons for the decline given various concerns including the upcoming mid-term elections, the ongoing trade war with China, concern about Federal Reserve interest rate policy, rising geopolitical tensions, and slowing global growth to name a few. Nonetheless, what is not in dispute is that the market direction changed dramatically following an interview by Fed Chairman Jerome Powell on October 3, 2018. Whether intentional or not, Mr. Powell’s comments seemed to convey a greater sense of urgency on the part of the Fed to raise interest rates more aggressively.

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September marked the ten-year anniversary of the Lehman Brothers bankruptcy that caused the financial markets to seize up around the globe. And as is often the case, there is a lot of “revisionist history” going on by a number of key players in an attempt to deflect criticism. However, as you will see, there were many things that preceded the Lehman Brothers filing that sowed the seeds of the crisis. The good news is that much has changed for the better, yet some important lessons are starting to fade.

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The AAII Investor Sentiment Survey is a subcomponent in the Sentiment indicator in TJT’s proprietary InVEST Risk Model®.

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The AAII Investor Sentiment Survey has become a widely followed measure of the mood of individual investors. The weekly survey results are published in financial publications including Barron’s and Bloomberg and are widely followed by market strategists, investment newsletter writers and other financial professionals.  Source:  AAII

The S&P 500 index rallied in the month of August to close above the 2900 level for the first time in history. At 2901.52, the S&P gained roughly 3 percent in August as a strong dollar attracted foreign capital, in addition to a healthy U.S. economy, accommodative Federal Reserve policy, and higher corporate profits.

 

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The S&P 500 forward P/E is a subcomponent in the Valuation indicator in TJT’s proprietary InVEST Risk Model®.

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The equity market rallied in July despite the fact that the official trade war with China commenced on July 6, 2018. As President Trump had been threatening China with tariffs for months leading up to that date, it allowed ample time for hedges to be put on to protect against a falling market. As the world did not come to an end in early July, many of those hedges were removed, cash came in, and the market rallied.

The relief rally has not eliminated the uncertainty around a protracted trade war with China, which continues to be a potential headwind for the markets.

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The LEI is a subcomponent in the Economic cycle indicator in TJT’s proprietary InVEST Risk Model ®. 

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Ongoing trade tensions dominated the headlines and market action in the month of June as concerns mounted that any tariffs imposed by the U.S. against our trading partners would be met with swift retaliation. The tit-for-tat threat of a trade war saw an escalation in rhetoric as China’s President Xi reportedly said “In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek…In our culture we punch back.”

 

Despite that, the S&P 500 index eked out a 0.48% gain in June, excluding dividends…

 

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Uncertainty over trade policy and elevated trade tensions, rising political instability, and the Federal Reserve tapping on the brakes have caused volatile swings in stocks, bonds, commodities and currencies. Higher debt levels across the board make economies more sensitive to higher interest rates, and interest rate spikes due to political uncertainty can have ripple effects across markets. (6.4.18)

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