Changing Tides

Insights from the Greenwood Capital investment team: Walter Todd , John Wiseman , Mark Pyles , John Decker, CFA , Justin Bartanus .

• Retail Sales data showed strong consumer spending with numbers beating estimates at all levels.
• After the previous week’s large upside surprise to jobless claims, the most recent print came in at 241k, which was slightly below consensus. As the noise from weather and strike disruptions flow through, the next few weeks will be more telling.
• The most recent Q3 GDP estimate shot up to a very solid 3.4%.
• Surveys continue to generally disconnect from the data, with the University of Michigan survey last Friday showing softening demand and the Empire Manufacturing Index showing weakness in general business conditions.
• The U.S. Dollar Index (DXY) continues to surge, having moved over 3% in recent weeks; precious metals (e.g., Gold, Silver) continue to move meaningfully higher.

Takeaways:

Recent data continues to show a resilient economic backdrop, with strong growth and a healthy labor market. We do expect upcoming volatility as we work through the lagged effects of the port strikes and hurricanes that have impacted our communities. Commentary from industry leaders also suggests that there is hesitation for companies to take on new projects or make significant investments ahead of the election, but that activity could pick up shortly following the election.

Listen to Walter discussing consumer spending on BBC Radio.

• The S&P 500 rose 0.8% last week bringing the YTD total return to over 24%.
• Smaller cap stocks outpaced the market last week with the S&P 600 rising 1.6%.
• Sector leadership in the young quarter is a mixture of cyclicals (Financials, Energy, Industrials) with Consumer and Healthcare names lagging.
• Though ex-US had a strong Q3, it has lagged the US meaningfully thus far in October, brought down by Asia-Pacific and European regions.

Takeaways:

The market continues to digest risks and uncertainties well and continues to create new all-time highs. Though we do expect continued volatility, it appears for now the path of least resistance for the market is higher. We are encouraged by early earnings reports and the recent move in smaller names and we see investment potential in industries that have lagged but now offer the chance for greater participation.

• Corporate bond spreads remain at the narrowest levels of the year, suggesting little concern about economic headwinds; credit spreads tightened significantly after the Fed’s decision to cut rates.
• Bond issuance is robust with the typical bank issuances after their quarterly earnings reports.

Takeaways:

Bonds were little changed on the holiday-shortened week. Several Fed members are set to speak next week after which the quiet period begins for the November 7th Federal Open Market Committee meeting. While rates continue to generally move higher following the rate cut, there appears little signs of credit stress in the markets.

• Recent polls, particularly in top battleground states have moved decisively in favor of former president Trump; however, all are still within the margin of error.
• Betting odds for a Trump presidency as well as a GOP sweep have moved higher and currently are suggesting roughly a 60% chance of a Trump Presidency and a 42% chance of a Republican sweep.
• Stocks and other asset classes (the US Dollar) seen as beneficiaries of a Trump presidency as determined by Strategas Research Partners have outperformed in recent days.

Takeaways:

Recent data suggests that the current political momentum lies with the Trump campaign. This change in expectations has led to some additional market volatility as investors realign expectations. However, betting markets and investors have been caught wrong-footed several times already during a truly unique campaign cycle. We do make note of the policy differences between the candidates and continuously monitor for investment opportunities regardless of the ultimate election outcome.

However, we ultimately still view the outcome as a toss-up and thus are making no major changes in anticipation of any particular result.

This week is a light week with October preliminary PMI Manufacturing and Services, New and Existing Home Sales, and Initial Claims data. Earnings season is in full swing, and we should get a clearer picture on the state of the economy as we hear from a number of names including Texas Instruments, Boeing, UPS, Coca Cola, and Verizon.

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This commentary represents the opinions of Greenwood Capital Associates, LLC and is for informational purposes only. The information contained herein has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. It is not intended as a basis for the implementation of any particular investment strategy or any decision to purchase or sell. The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Investment Advisory Services are offered through Greenwood Capital Associates, LLC, an SEC-registered investment adviser.