November 6, 2018

Stocks opened higher again today as voting gets underway. The Dow is currently up 114 pts and the SPX is up .4%. Most major market sectors are in the green, led by materials (+1%) and industrials (+1%). Those two groups are widely seen as the primary beneficiaries from a potentially split congress that may only be able to agree on higher infrastructure spending. In addition, the fact that stocks are rising seems to suggest that the “Blue Wave” won’t show up at the polls. Further, if investors sniffed a return of Democratic control in both the House and Senate, you’d at least see healthcare stocks falling today. The point is, market action is telling us what investors expect: gridlock. The VIX Index is still hovering around 20, but VIX December futures fell to 18.5 today. So the options market doesn’t seem to expect a continuation of the stock market correction. We’ll see. Commodities are trading mostly lower today. WTI crude oil fell 2.4% to $61.60/barrel after President Trump granted Iran a trade sanction waiver. Bonds are trading modestly lower as interest rates tick higher. The 5-year Treasury yield is back up around 3.04% (the 2018 high is 3.07%). The 10-year yield is trading at 3.21% vs. the 2018 high of 3.23%.

Despite the fact that the financial news media has been trash-talking technology stocks for the past couple of weeks, Goldman Sachs says hedge funds stepped in to buy the sector during the last few days of October. The firm’s research shows institutional investors mostly bought tech and consumer stocks as the stock market correction reached 10%. According to Bloomberg, “…there’s scant evidence the carnage has altered their opinion on which stocks to own. This can viewed bullishly—investors stuck to their guns amid a market trauma—or as a bearish indication that the excesses that predated the sell-off haven’t unwound.” I’ll just point out that some of the stocks facing the most derision from investors are down quite a bit more than 10%. Apple (AAPL) fell 13% and now trades at 15 forward P/E ratio (vs. the S&P 500 at 16). Alphabet (GOOGL) fell nearly 20% and trades at P/E of 20. Facebook (FB) is down 35% and trades at a 17 P/E.

The Federal Reserve’s next interest rate policy announcement will come on Thursday. Most traders expect the Fed to hold off on raising rates again, and will instead do so at the December meeting. Bloomberg’s Cameron Crise says investors are worried “that the Fed may be on the brink of a policy error,” in that it seems hell-bent on continued rate hikes even as the economy is expected to slow. But, he surmises, “The reality is that the Fed is simply ‘taking back control’ of its policy settings” after a long period of zero interest rates. Mr. Crise points out that the Fed has raised its short-term policy rate by 100 basis points over the past 12 months, but because inflation has also increased, the amount of real—or inflation-adjusted—tightening has been only about 35 basis points. And, by the way, during the last two policy cycles the Fed raised nominal rates 200 basis points in a 12-month period. So his point is that the Fed is taking a very gradual approach this time and has avoided any hasty moves. Do we fear the Fed too much?

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