The month passed without too many alarms but with a few surprises and political shenanigans along the way. This included an unexpected deal which seemed at one point to have a chance of going through, before being scuppered by the remain favouring majority in the houses of parliament.
Market & Portfolio Returns Comments.
For UK equities this meant a pick up for the more domestically sensitive sectors and indices like the Mid 250 and Small Cap which delivered positive returns in the month. While the broader more international larger indices the FTSE All Share, FTSE 350 & FTSE 100 all saw negative returns as the effects of a relief rally in Sterling hit sentiment on some of the larger stocks and sectors. For the Compound Income Scores Portfolio, with its bias toward Mid & Smaller stocks, this meant a better month relative to the broader market as it clawed back some of the under performance from last month. The small positive return left it up by 14% YTD which is 1.2% ahead of the FTSE All Share. If it is of any interest you can see the full performance history since inception in April 2015 here and detail about the Scores which help with the stock selection here.
Market Timing Indicators & Outlook Comments.
Despite this the Market Timing indicators that I produce for the UK markets remained in positive territory to varying degrees with the 250 being the most bullish & the Small Cap Index the least with FTSE 100 in between. Given this and despite a small tick up in the US unemployment rate, no sell signal has been generated again this month. So despite all the political worries domestically over BREXIT and the forthcoming election and the on going trade dispute and global economic slowdown one should probably remain invested.
Worth bearing in mind though that the US Manufacturing ISM index remained below 50 this month (recession territory) and the US yield curve went negative a few months back (an advance warning of recession). Thus far though, despite the economic slowdown, a robust employment and wages background seems to have been sufficient to keep things ticking over kept consumers spending. Corporate spending however seems to have turned quite cautious with investment spending tailing off quite dramatically and not just in the UK due to BREXIT, while share buy backs and dividend have continued to support markets.
This has however left UK equities looking pretty unloved and good value compared to both their history and other asset classes. This also suggests it is probably worth remaining invested as if a few things turn out better than expected then there could be quite a decent rise in sterling based assets including equities. If not then at least the lower valuations than elsewhere mean they might offer more downside protection than some other markets.
Summary & Conclusion.
So we survived the often tricky October without too much harm despite all the scares along the way. Timing indicators and valuations suggest that in the UK at least one should remain invested for now. While in the UK we also have the General Election and associated BREXIT bullshit to look forward to. We are also entering a seasonally stronger period with the potential for some resolution of the political log jam, if any party can come out of the election with a working majority, big if I know. I must admit for about 5 minutes there I thought that might have been possible if the Tories had done some kind of leave pact with the BREXIT party, but Nigel Farage seems to have ruled that out now. This seems to make a split of the leave vote more likely while remain favouring parties seem to still be talking about some kind of rebel alliance and many are already talking about tactical voting (sigh).
To me it looks like a hung parliament or or perhaps some kind of remain coalition might be the end result but who knows?!
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.