Monthly Brief November 2019 – Shifting Market Leadership

Monthly Brief November 2019 – Shifting Market Leadership


The more things change, the more they stay the same.  November was primarily (once again) marked by shifting levels of concern regarding global trade relations, primarily focused on China.  Ironically, hindsight would suggest that the reduced angst over the daily tariff-watch was assisted by the distraction of impeachment hearings, taking some of the focus off global trade without an apparent negative influence of its own on capital markets. 

What continues to drive global markets?  The list is the proverbial “broken record” and has not changed for some time: US/China trade, Brexit, global economic growth trends, central bank monetary policy (i.e. interest rates), Hong Kong protests/potential Chinese intervention, and the US political climate – both today (impeachment process) and the future (2020 election).  Going through this list, the current conditions are a mixed bag.  Yet, investors moved most global equity markets higher during November?  What is the message of the markets today?

Monetary policy and global trade are tops on the list.  November saw further confirmation that global central banks remain in an accommodative mood, while it also appears that some tariff-fatigue has set in as the cycle of negotiations seems to repeat itself.  And against this backdrop, optimism has started to be rekindled as many measures of global business conditions are being interpreted as having bottomed.  While this alone does not suggest the next economic expansion is around the corner, it has caused many economic and earnings forecasts to be modestly upgraded.  Whether this is viewed as “improving” or “less bad”, it was enough for investors to drive markets higher during the month.  Going forward, these issues are likely to remain the drivers of investors’ risk appetite.  And while the ebb-and-flow is likely to continue, accommodative central banks and avoidance of negative surprises in the US/China trade negotiations will remain critical for stable markets to persist through year-end.

CHART OF INTEREST – Shifting Market Leadership

The equity markets decline during the fourth quarter of 2018 fortuitously bottomed shortly before year-end, providing a springboard for outsized gains coincidently coinciding with the 2019 calendar year.  After reclaiming the losses of late-2018 by mid-year, the S&P 500 Index moved sideways before making another run higher from September through November.  While the year-to-date gains have been well above average, 2019 has really been two separate market environments.  First, the reclaiming of the previous 2018 high from January through August that, surprisingly to many, was led by equities featuring defensive and cautious characteristics.  Then followed by a move to new highs during September through November, but with a marked change in leadership towards equities containing economically sensitive characteristics consistent with an improving economic outlook.

This dynamic is visualized in the accompanying chart comparing the relative performance of the iShares Edge MSCI Min Vol USA ETF (USMV) with that of the iShares Edge MSCI USA Value Factor ETF (VLUE). USMV tends to have characteristics consistent with conservative and/or defensive equity selection, while VLUE tends to have characteristics much more sensitive to economic conditions.  

While not necessarily intuitive, equity market gains off the December 2018 bottom were led by defensive and/or cautious positioning through August, consistent with USMV outperforming VLUE.  The second phase saw this relationship flip towards favoring positioning coinciding with an improving economic outlook.  While much can be read into the shift in leadership, it does suggest investors psyche has become more optimistic (or maybe less pessimistic?) about stabilizing/improving global economic growth.

James Ferrin, CFA
Chief Investment Officer

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