No Volatility?
It’s important to constantly review the level of volatility in the market to quantify how unusual the market has been this year. To a long term investor, normal changes in volatility shouldn’t matter. However, when records are constantly broken, we need to re-evaluate the market to see what’s going on. The Dow Jones Industrial Average is currently on a streak of days without an intraday move of 1%. The streak is 51 days, making it the longest one since 1930. The unusual part is that the second longest streak was 50 days and that happened from late 2016 to early 2017. The third longest streak was 34 days in 2016. This two year period has been the quietest in history according to many metrics. One of those is shown below. It is the percentage of days with less than a 1% intraday range in the Dow. As you can see, 95.7% of days meet that qualification making it the highest ever. It’s interesting to see how every year in this table is from either the 2010s, the 1940s, or the 1950s. None of the years in the 1990s made this streak probably because of the movement upward of over 1%.
It’s difficult to pinpoint why stocks aren’t moving. The idea that volatility is suppressed by ETFs probably isn’t true because only 6% of stocks are controlled by ETFs. Another possibility is QE. The chart below shows the historical balance sheet of the Fed. As you can see, it was high during the 1940s and the current market. This could be correlation not relating causation to or it could be a signal of the market being affected by the asset purchases made by the Fed. We’ll find out soon enough as the Fed is expected to unwind its balance sheet to about $2.5 trillion in the next few years.
Speaking of Fed policy, the Fed is having its November meeting on Wednesday. I don’t expect any hike in interest rates or any tone change. The Fed is expected to raise rates in December. These are the last few meetings where Yellen will be in charge. I think we will see a quick shift from the media and the markets as they zero in on Powell’s thoughts. Yellen is probably still important because he has a similar outlook to her. We will get the Powell selection in the next few days. Powell is at an 80% chance of being picked and Taylor is at 8%. The decision will most likely be made public on Thursday. It’s a break in the historical trend because every single Fed chair in modern history who completed their first term was nominated for a second one. I have focused on this decision heavily because I knew President Trump was going to make this unprecedented decision. As it turns out, this choice is unremarkable as he went with a slightly more dovish version of Yellen.
Economic Reports
We reviewed the amount the consumers said they would spend on Christmas gifts and we’ve looked at many consumer sentiment reports which show optimism. Let’s now look at the latest consumer spending report which was released on Monday. Consumer spending had its biggest gain since August 2009 in September. However, this was helped by the motor vehicle spending to replace damaged cars from the hurricanes in Florida and Texas. The month over month gain was 1.0%. Besides motor vehicle sales, increased spending on utilities also drove growth. Even with this help, consumer spending increased 2.4% in Q3 which was down from 3.3% in Q2. As I mentioned in the article on the GDP report, the Q3 report was helped by inventory investment. Spending on services was up 0.5%. Personal income growth doubled to 0.4% while savings fell $441.9 billion.
Sometimes the bears get overly pessimistic about how personal savings is falling to the levels seen before the financial crisis. However, this isn’t necessarily reason to panic because the median net worth is rising because of real estate and stock prices. If stocks and real estate fall, there will be a problem, but that’s not a new idea. Regardless of where savings is, stock prices and real estate falling are bad for people who own them. Savings has been in a secular decline because interest rates have fallen. That should make investors stop worrying about this issue.
Core PCE increased 1.3% in the 12 months leading up to September which was the same result as August. It was up 0.1% month over month for the 5thstraight month. I don’t take too much stock in this because the 10 year breakeven inflation rate is still in an uptrend. The stats from September are fairly old now that we’re starting November. I still think an acceleration is in the cards.
The other economic report on Monday was the Texas manufacturing survey. Every single segment of the survey was increasing/improving. The general business activity was 27.6 which was an improvement from 21.3. This means 27.6% more firms said there was an improvement in activity compared to the number which said activity was worsening. The production index was 25.6 which was a 6 point increase. This was the highest reading since April 2014. New orders increased 6 points to a 10 year high of 24.8. As you can see, manufacturing hasn’t skipped a beat in the Texas area.
The GDP Now initial estimate for Q4 was released. It shows a forecast of 2.9%. Usually the first estimates are wildly optimistic, so this is an unusually reasonable estimate. It is below the NY Fed estimate which is at 3.05%.
Conclusion
It’s amazing how small the movements in equities have been this year. Whenever it looks like a bad day is about to occur, stocks recover in the mid-afternoon, limiting the losses to usually below 1%. The risk that President Trump would pick Warsh or Taylor as Fed chair has diminished. Therefore, stocks have room run for the rest of the year as inflation is still stable. I’m expecting the holiday shopping season to be a blockbuster one, meaning I expect higher than 4% year over year growth.
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