This may be a triumph of hope over expectation but just a couple of positive straws in the wind as US / China talks resume raising hopes yet again of a possible toning down or maybe even an end to the escalation of their trade war. This would tie in with my theory about Trump's Machiavellian plan to game the US economy for his electoral benefit.
Meanwhile in the UK their was an unexpected turn of events as the BBC reports - "Brexit Secretary Stephen Barclay is to meet the EU's chief negotiator later - after Prime Minister Boris Johnson and his Irish counterpart agreed they could "see a pathway to a possible deal".
Notable movers this morning are the House Builders and Banks as markets maybe react to the possibility or an unexpected deal to leave the EU and therefore less drastic times for the domestic economy. Even the soggy old Pound is up a bit. Or maybe it just reflects some bear closing ahead of the weekend in case there are some positive developments?
Nevertheless it is worth remembering that the UK market is pretty unloved and beaten down in terms of its valuation, so any positive surprises could lead to a sharp bounce, I suspect, if indeed there is a "pathway to a possible deal" which could be a Stairway to Heaven for Brexit supporters. Or will it be another Long & Winding Road to an extension, a Highway to Hell of another referendum or a Labour Government , a Road to Nowhere or the Hotel California - take your pick. Personally I still suspect we'll be forced into another extension and probably a second referendum down the line so that the MP's & the EU can get the "right" result as they see it this time.
Sorry for the tired old music analogy, but couldn't resist on a day when incredibly HMV said it was going to open a massive new store spanning 25,000 sq ft across one floor - almost the size of 12 tennis courts - HMV Vault in Birmingham promises to become a "Nirvana for music and film fans". This comes apparently ahead of the 2nd National Album day tomorrow - encouraging fans not to skip but to discover albums. Strange days and before I Ramble On I'll just finish up by saying bizarrely I've "revisited" an album - Abbey Road - 50th Anniversary which has been in the news and apparently topped the charts, having missed it first time around. But ironically I've done that via Spotify - so good luck to HMV's & indeed Thomas Cooks Travel agents new owners as I think they are probably rowing against the tide.
In brief we have had a couple of international recruitment companies in the UK provide trading updates today, namely Page Group and Robert Walters. The latter, despite reasonable numbers in the year to date referenced "Macro Uncertainties" as a reason for expecting their full year results to be only in line with last year now. While Page used the following "heightened political and macro-economic challenges seen in the quarter, together with our limited forward visibility..."
So both pointing to a flat outcome rather than a disastrous collapse, just yet. But these can be a good indicator of coming problems as hiring is usually one of the first things to be cut back in more difficult times. Of course if all the troubles blow over and it turns out to be a mid cycle slow down, then maybe recruitment will pick up again with the economy, but they could be a Canary in a Coal Mine
Markets proved to be sanguine in September, some may even say complacent, given the on going trade disputes and mounting evidence of a global economic slowdown. In the UK equities provided a positive total return of around 3%. This meant that the Monthly timing indicators that I produce continued to trade in positive territory and that one should remain invested for now despite the deteriorating macro background.
Talking of which, in addition to the trade war and the never ending / not leaving BREXIT saga, we have also had particularly poor manufacturing ISM numbers globally where these have moved below 50 suggesting recessionary conditions in manufacturing at least. While the arguably more important Services sector PMI's also fell this week in the US but remain above 50 suggesting on going growth in those parts of the economy for now.
I saw a good note on this recently from John Authers on his free daily newsletter via Bloomberg which is worth signing up for if you are interested in this kind of thing. He included this graph on the history of these series:
His comments on this were as follows:
"Do either of these data series clearly signal an oncoming recession? No. But they are behaving just as we would expect if a recession were in the offing, and any further deterioration would be a clear recession signal. Services, far more significant to the modern U.S. economy than manufacturing, remains above the level of 50 (shown in red) that marks the dividing line between expansion and contraction. But as the chart shows, it tends to be more of a lagging indicator than manufacturing, which is now well below 50.
It’s no surprise that manufacturing is more cyclical and more variable, or that the services PMI tends to be higher, as it's been the healthier sector for much of the time that the two surveys have been produced. On several occasions, the manufacturing survey has dropped below 50 without a subsequent recession; but this hasn’t yet happened with services. In 2016, the last false recession alarm, the services number dropped sharply but never fell below 50."
So some reassurance there that we may not be heading for a recession just yet, although as we know the US Yield Curve has inverted recently and that tends to give advanced notice of a recession maybe a year or two ahead - see the charts below for more details.
Finally this week we had the eagerly anticipated Non Farm Payrolls which is the other indicator I am following for anticipating a recession in the US and taking avoiding action in terms of asset allocation going forward. In this instance, despite worries beforehand, they were OK and the headline Unemployment rate actually fell to 3.5% thereby keeping that indicator in positive territory too for now.
Thus while it seems we still need to be increasingly wary of the possibility of a US recession emerging in the year ahead, some of the more reliable indicators of this have still not been triggered yet. In addition the Central Banks have been stepping up to the plate and writing their Puts again which may help to protect markets and the economy if it is not too little too late. Nevertheless there seems to be a consensus that given where rates are starting from, they will need a little help form their friends in government by way of fiscal easing too.
There was also a good article about all this in the FT which you can read here if you wish.
Overall I'm getting increasingly nervous about a forthcoming global downturn caused by the financial excesses / debt build up in the last 10 years and by an unwinding of globalization due to the the Trump US/ China trade war. I do still wonder if Trump is playing games and will come up with a deal soon so as to get the bad news out of the way just over a year before the election. Thus they'll be a year into the recovery phase by the time of the election if this turns out to be a mid cycle slow down rather than a precursor to a recession. Plus if consumers remain sanguine on the back of low unemployment and rising incomes then maybe things can keep ticking over, unless that's a triumph of hope over experience?
I guess time will tell on that, but after a poor month for the CIS Portfolio I have taken out a couple of more cyclical stocks which disappointed recently & reintroduced one more defensive name which has a top decile Score again now. Subscribers to the Scores will be able to see the detail of these trades in the Portfolio and Transactions tabs of the sheet.
So a further shift in a more defensive direction given the above background, but no moves yet to take out more hedging or non equity type exposure just yet given the still positive signals from the indicators that I follow. So whatever you decide to do with your portfolio in these potentially more difficult times ahead, be careful out there as it is October a notoriously difficult month, but just make sure you do whatever gets you through the night.
August turned out to be a more difficult month for UK Markets as Global economic growth worries and the US / China trade dispute continued to rumble on in the background like the inevitable summer thunderstorms. In addition the BREXIT circus continues and some fear that a no deal exit is now more likely, although perhaps a majority of MP's will make sure that doesn't happen and maybe that we never even leave.
All that seemed to hit FTSE 100 harder this month, which is perhaps a bit surprising as Sterling lurched down again on the no deal fears, but perhaps it just reflects some selling in thin markets and the larger more liquid names being more exposed to this? In any event Mid and Smaller Companies held up slightly better and as a result all the indices remain above their respective moving averages, although only just in the case of the Small Cap index. So the timing indices still suggest remaining invested as do the other economic indicators that I watch in this regard, although they have recently started showing some signs of weakness too, which is worth watching given the worries about economic growth generally. Plus the fact that we have now seen yield curves inverting, which while not an immediate timing / sell signal, these have had a good track record of occurring before previous recessions albeit often quite far in advance.
As I hoped last month this also led to mean reversion and bounce back in the performance of the CIS Portfolio, although this is only in a relative sense as it produced a smaller negative total return of -1.25% v - 3.57% for the FTSE All Share. This does however put it back ahead of the FTSE All Share for the year to date with a return of +13.38% v 11.12% for the Index. While since inception it has produce 13.54% per annum versus 5.56% per annum for the FTSE All Share.
Post the summer break I've decided to make a couple of changes to the portfolio based on selling stocks where the Scores have deteriorated and stayed low despite results from the companies concerned. These were replaced these with one large fairly boring defensive stock, given the background / outlook and a smaller growth stock operating in the healthcare which seems to offer reasonable value, although there may be some political risk as it works with the NHS.
Subscribers to the Scores can see those transactions and changes to the portfolio in their Scores file now. If you unfamiliar with them and would like to find out more about the Scores which have helped to produce the performance discussed above, then please see the link in the relevant site navigation bar or by clicking here.
Finally as we continue to sail in what seem like uncharted investment, economic and political waters I'd suggest having your life jacket at the ready, keeping an eye on the lifeboats but continue to enjoy the voyage and the music as the band plays on in a patient and common sense fashion as Lord Lee would recommend in this interview about with him about his new book designed to explain Stock Market Investment to children.
Another strong month for equities helped the UK Market timing indices that I calculate to push further ahead and above their moving averages. This was led by the larger more international FTSE 100 as Sterling fell on the back of increased rhetoric about a no deal BREXIT from the new PM Boris Johnson. Mid Cap and Smaller Company Indices did less well given their more domestic focus and BREXIT related worries. Nevertheless they are also in positive / bullish territory in terms of their timing indicators, to the tune of 3 to 5% versus the 7 to 7.5% for the larger All Share & FTSE Indices.
As for the CIS portfolio this month the less said about that the better as it suffered from its bias towards Mid and Smaller Companies this month and in particular from a poor new selection last month which went onto warn and 9 other positions that fell by double digit percentages. Against this the portfolio only had a few positions that rose and none of those by double digits percentages.
Consequently the portfolio did -3.3% versus the +2% total return for the FTSE All Share, which now leaves it slightly behind for the year to date. Hey ho, I guess that's the rough side of a focused portfolio which will diverge from market returns in both positive and negative directions.
As it has just had a couple of bad months, we are in a holiday month and I am in the process of completing a relocation, I've decided to leave the screening this month. This will let the dust settle and the portfolio may even benefit from some masterly inactivity and the magic of mean reversion, perhaps. That's all, now for some more sorting out, hope you have / had a happy holiday wherever you manage to go.