End September update

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.
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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."
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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.