August 24, 2018

Update - What Now

“Overconfidence is fed by the illusory certainty of hindsight”   - Daniel Kahneman

As we enter into the month of September and the transformation from lazy summer, it’s the back to school and vocational enthusiasms that seem to show up everywhere. Unfortunately it all tends to be temporary and by the time October rolls around the draw of the holiday season collides with the increasingly colder days of fall. And this fall tends to be an interesting one, for a number of reasons, as I’m sure you are aware.

The Markets
Whenever October rolls around the talk of historical collapses in market valuation increase in volume because October is the month when the market declines seem to take place. However in keeping with the above quote I prefer to see the preparative behaver of the pundits, widely dispersed in the internet age as a better indication of what won’t occur. Namely, markets don’t go down because we think they will, and are more than likely to go up when we think they won’t. My current opinion is that the broad markets will likely continue to churn, not charge, higher until the end of the 3rd Quarter, which ends on September 30th. Between now and then it’s what will begin to enter the narrative, separate from the above behavioral wedge, which begins with what I call the Brexit Effect.

The Brexit Effect
In the past few years much has been made of rapidly changing political and economic dialogues gripping academia and politics. Beginning with Brexit, the vote in favor of the UK leaving the EU and following the 2016 US election and the numerus similar conditions around the world there is much to suggest that no country has a lock on the craziness. Luckily though the markets do seem to be content to ignore the dissonance which should be remembered is not the same being oblivious. This is important because each of the aforementioned cultural shocks that I prefer to call Black Swans* was proceeded by an increase in volatility as measured by the VIX Volatility Index**, and used to justify impending doom. But just as the 2016 presidential election experienced its own battle with increased volatility the follow up in each case was a return to the direction leading up to the distraction. I bring this up, because after the end of the 3rd Quarter, from October 1st until Election Day on November 6th I would not be surprised if volatility returned to the capital markets as a tidy backdrop of what is sure to be visceral coverage in the media.

The Fed
It is my opinion that the impending meeting by the Federal Reserve Board toward the end of September is another activity that is worth mentioning particularly in that it might very well be it’s last of the year. With recent consumer confidence steady and inflationary trends subsiding a bit, in domestic areas of strength such as manufacturing and housing in particular, one can point to increasing debt costs, and the influence of recent trade issues. And since those industries gained the most from the recent tax legislation convincing signs of deceleration has been a slowdown in CAPEX expenditures (what companies spend on themselves).  In my opinion I have to consider these as potential influences on the continuing goal of the Fed to raise rates one more time before year end. That said, it doesn’t mean the economy will follow suit, only that the Fed will lean to desiring more time before continuing on their current path.

Markets and politics are not the same thing, they don’t even rhyme. And as the fall season progresses, with all that comes with it, the goal for accounts will be to adjust positions to reflect the upcoming start of the New Year. With my opinion leaning toward the global markets ending the year constructively, the rest of the year is probably going to be reflective of the outcome of the election. And while I’m confident that it won’t likely have much impact on the economy I’m uncertain on the impact of the distraction and potential for a stop to any meaningful legislation. But for right now the need for discipline and patience are the tools of choice, to remain active, but respectful of the volatile times ahead.