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.