November 1, 2016
U.S. equities notched another modest loss for the month of October with the S&P 500 Index dropping -1.94%. That puts the Year-to-Date gain in the S&P 500 at 4.02%. The DOW has taken investors for a wild ride to nowhere the past two years. It was December 23, 2014 that the DOW surpassed 18,000. The DOW finished October at 18,142.
The Markets – Our long-term concern is China, not the U.S. Election. China’s banks have lent too much money and created too much supply in the economy that is not needed. The country’s property market, perhaps, offers the most visible sign of this, with many homes and offices standing unsold and empty. Earlier this month, the Bank for International Settlements (BIS) published data that suggested banks in China may face a crisis as a result of the surge in borrowing.
The BIS, often described as the central bank for central banks, measured the gap between credit and GDP, scoring China at 30.1 for the first quarter. Any level above 10 suggests a crisis might happen “in any of the three years ahead”. China’s score dwarfed the second highest of the countries assessed – Canada at 12.1.
Crowd mentality; surveys at the recent Schroders Investment Conference in Lisbon show that after years on the sidelines, emerging markets are returning to center stage for global investors. Half the audience, which was made up of more than 150 fund selectors, intermediaries and advisers from around the world, cited emerging markets as their most relevant investment theme for the next 12 months. Clearly these professionals discount a Chinese crisis anytime soon. If a crisis in China does occur, emerging markets will be especially dicey.
The Election – The opinion polls are narrowing, but seem to indicate a Clinton victory and the markets seem to have priced in a Clinton victory as well. I suspect if Trump pulls off a last minute surprise victory, the markets will correct. They seem to react to the expected by not changing trend and deal with the unexpected by correcting 9% – 14%.
The Economy & The Fed – With all the political rhetoric ramped up and the major parties selling fear, we would like to provide some calming commentary. Did you know that inflation is exactly at the 20 year average? Unemployment? Are you aware unemployment sets at a pretty standard 5%? What about global production? Global production level growth is 3.1%, which is spot on the 40-year trend. The economy is so normal it’s unusual. GDP is a tad weak & U.S. production is slightly weak. Most importantly though, whoever wins the election will inherit an average economy but must deal with a dissatisfied public and some rather dramatic rhetoric from the opposition.
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