1. Moving the markets

Ever since we had 2 down days at the beginning of October, equities have been on a relentless march higher (green arrow in chart) with virtually no interruption. Despite the Fed’s efforts to lower interest rates, this rally happened in the face of rising bond yields, an event that usually takes the starch out of upward equity moves.

But we seem to be living in a financial system where historical norms no longer apply. The fallout from higher rates has been a recent underperformance of not just bond ETFs but also the low volatility ETFs like SPLV, which had been one of the top performers for the first 9 months of this year. In my advisor practice, I have now reduced our exposure to SPLV.

It simply lost its luster, as a result of 10-year bond yields starting to hiccup early in September, after having been on a downward trajectory all year. Today, the yield rocketed another 8 basis points higher to close at around 1.86%, which is within striking distance of taking out the September high of 1.90%.

If this continues, there will be a point, however, when equities will be affected by rising yields, but that moment in time is still the big unknown. On the other hand, as I posted yesterday, thanks to the largesse of the Central Banks injection of liquidity (the Fed added $250 billion just in the last 8 weeks), we have now two opposing forces, that simply can be looked at as an ongoing tug-of-war between bulls and bears with the outcome to be determined.

While today was a session during which the major indexes clustered around their respective unchanged lines, it looks to me, for the time being, that the power of liquidity may win and propel the markets higher, despite extreme greed having set in already.

1. Moving the markets

Despite the Fed’s market pleasing efforts yesterday, it appears that the US-China trade talks, or rather the lack thereof, have enough power left to affect market direction. Such was the case this morning when a report said that “Chinese officials have doubts about the prospects for a long-term trade deal with the US.”

Attempting to dampen the subsequent fall of equities, Trump came out and announced that a “transitional deal” would be still signed soon, although the warring parties need to pick a new site for this event, as the previous host, Chile, canceled the mid-November summit.

Just the fact that the Dow was down a “shocking” 240 points this morning caused all kinds of action by the administration, as economic advisor Kudlow came out and attempted to jawbone the markets higher with goodies like “US-China talks going smoothly.” It did have a momentary positive effect, as this chart shows.

Then the blame game continued with Trump seething that “China’s not our problem, The Fed is.” You almost have to laugh at the silly notion that it seems no longer acceptable to have a minor correction, let alone a normal downturn as part of the business cycle. But that’s the world we live in, and we must deal with it.

In the end, the month of October, also known as the bull market killer, turned out better than expected, although it started out on a negative note with a 2-day sell-off. That was short-lived, and we seesawed higher with the S&P 500 closing the month with a respectable +1.9% gain.

It’s low volatility cousin, SPLV, did not fare as well and got blindsided by bond yields, which rose despite the Fed’s easing efforts. Just like in September, this chart shows the rebound in the 10-year yield (blue arrows), which affected SPLV negatively due to its interest rate component. Even though, SPLV gave back -0.58% this month, it remains ahead of the S&P 500 in YTD ‘Buy’ cycle performance.