October is known as a volatile month and this year was no exception. At one point the S&P 500 was down 10% since the beginning of the month. It finished down 7.3% while the TSX finished down 7%. Was there any one thing that caused the markets to be this soft all of a sudden? Not in our opinion. It was a coming to realization that there is weakness in the US housing market, China, Europe and trade tensions were continuing. Thursday night there were reports of a draft trade agreement being made by the US for China which was seen as a positive move however those reports are now being viewed as positioning for the US mid-term elections on Tuesday.

As always, there are distractions, facts and conclusions.

Distractions:

Tensions with Saudi Arabia over the death of a journalist is being floated around as Turkey looks to capitalize on the situation and make Saudi Arabia air out their problems publicly. In the end we don’t believe this will cause major trade disruptions and Trump has indicated that he doesn’t want the business relationship hampered by the issue. There are over $100 billion dollars in trade deals going through between the US and Saudi Arabia according to Trump.

The US has indicated that it is pulling out of the Intermediate-Range Nuclear Forces Treaty and Putin is capitalizing this saying that it will cause an arms race. While this may be true it is not likely to become the spark of a war or major trade disruptions.

The Facts:

Monday:

  • Germany: Chancellor Angela Merkel will not seek re-election after holding the position since 2005
  • US: Core PCE Price Index YoY at 2% from 2.2% previously

Tuesday:

  • Germany: Unemployment rate steady at 5.1%
  • Germany: Harmonized inflation rate YoY preliminary at 2.4% from 2.2%
  • S&P/Case-Shiller Home Price YoY at 5.5% from 5.9%

Wednesday:

  • Bank of Japan held rates at -0.1% and lowered inflation expectations. 10 year yield is around 0%.
  • US Employment Cost, Wages and Benefits QoQ up 0.8, 0.9 and 0.4. Cost and wages up more than the previous period while benefits were up less than the previous period.
  • Chicago PMI 58.4 from 60.4

Thursday:

  • China Caixin manufacturing PMI up 50.1 from 50 where below 50 is a contraction.
  • Discussion of US troop deployment to Mexican border to stop migrants and concerns over slowing the border which may affect trade.
  • US Initial Jobless Claims at 214k from 215k.
  • ISM Manufacturing Prices rose to 71.6 from 66.9 while new orders, employment and PMI all were above 50 but lower from the previous period.
  • Canada RBC Manufacturing PMI 53.9 from 54.8

Friday:

  • Germany: Import prices YoY 4.4% rom 4.8%
  • Germany: Markit Manufacturing PMI Final 52.2 from 53.7
  • Canada Unemployment Rate: 5.8% from 5.9%
  • Canada Imports and Exports decreased
  • US: Average hourly earnings 3.1% from 2.8% – strongest since 2009
  • US: Unemployment Rate: 3.7% steady from previous, strongest in 48 years.

Conclusion:

The US 10 year treasury ended the week at 3.21% which is almost back up to where it was near the beginning of October. If there were recession fears then the 10 year yield would be lower. Coupled with several members of the FOMC stating that they feel confident in a couple more rate hikes, rates are likely going to continue the upwards path.

While housing is still a softening spot in the economy, if earnings rise then that will create more affordability in housing and will offset the rising cost of borrowing to some degree. This is similar to how a caterpillar moves: Front, then back, then front, then back. Housing, earnings, housing, earnings. Provided this pattern isn’t derailed by weakness in other spots in the economy which will likely be caused by increasing rates and corporate bankruptcies but not yet. Until then we expect the economy to continue on at a moderate pace.

While the economy may take a breather, inflation is likely to get stronger as oil is realizing it’s impact as prices are still higher year over year and up from two years ago. These costs will be passed through and start to be realized in the near future. Labor does not have much slack and as a result wages are finally starting to rise.

Bonds will likely continue to suffer in this environment and stocks will likely be volatile but most likely outperform over the next two to three years. Geographically we favour the US as it has the lowest unemployment rate and is removing accommodative monetary policy whereas most other countries aren’t at this point in their recoveries and Canada seems to have a more heavily indebted consumer.

We will be looking for a sharp spike upwards in data and interest rates prior to the end of the bull market.

Tuesday is the US mid-term elections and we look to see if the republicans can hold on to power.

Weekly Wealth Tip:

Investing and wealth generation is a long term game. It requires discipline however that doesn’t mean you can’t have fun in the mean time. Taking hard earned money, saving it and investing that money is a simple and however it isn’t always practiced.

Let’s play a game this week and find one expense that you incur regularly and get rid of it. Then take that money and save it and invest it on a monthly basis.

In our household, this year we got rid of our cable and haven’t looked back. We called our internet provider and asked for a discount… granted. We cut a magazine subscription that we were not avidly reading. We also finished paying off a car loan. We changed the bank account types that we had in order to reduce the monthly fees. This amounted to over $500 per month in savings.

No matter your age or economic status, are you able to reduce your expenditures? Can you pick one thing to reduce or eliminate?

Until next week.

Trevor Dale, CFA

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