October can be a scary month for all types of reasons: Halloween, dark evenings, ominous clouds, your favorite football team’s hopes crushed, political changes on the horizon, and as has happened many times in the past, market volatility that escalates. On several occasions the JNBA Investment Committee had written and discussed the idea that the stock market had been coming increasingly narrow. In fact, by the second half of September, the global market leadership was so narrow that when the S&P 500 hit a new marginal high it was the only country in the All World Composite (47 total) to do so. The market was also touching new highs a couple weeks after small and mid cap stocks had peaked, so large cap U.S. stocks had decoupled from the rest of the world — not to mention from other smaller-sized publicly traded stocks in the U.S.
The narrowness of the global stock market rally had our Investment Committee rebalancing to more conservative positioning in the second half of the summer. While U.S. stocks perhaps recoupled to the downside with the rest of the world a bit later than expected, it did so abruptly in October.
The question now is whether or not this is the beginning of something more drawn out, or if typical cyclical patterns will hold true. Historically, the second year of a presidential cycle tends to be the worst with weakness into mid-term elections, followed by a rally into year-end (see chart above). Given strong trends for both the presidential cycle and the seasonal cycle, this would be a baseline expectation considering that the economy appears to still be on a solid footing.
However, in order to become more constructive on equities, the JNBA Investment Committee would like to see a broadening of participation from various sub-indices like the Russell 2000 for small company stocks, as well as uptrends vs. downtrends for the majority of countries in the All World Composite. Tighter global monetary conditions, accompanied with high-market valuations and little upside participation, has us currently viewing the global investment landscape through a cautious lens — and not rushing back in on the current dip. Broadening participation that accompanies favorable seasonality would give us more confidence that a firm bottom for equities is in place and that the uptrend is more likely to resume.
The JNBA Investment Committee spent the second half of the summer positioning portfolios more cautiously. It appears now that some level of caution was warranted. We continue to carefully monitor global market conditions to determine if the trend has finally changed, or if the current selloff is presenting opportunities. An increased percentage of countries participating to the upside may likely hold the answer.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, Inc.
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