A volatile third quarter of 2019 has come and gone. Despite ongoing fears regarding trade, attacks on Saudi oil facilities, more Brexit drama, problems in the repo market, and, finally, the possibility of impeaching the President of the United States, the American economy is holding up well in relative terms. The S&P 500 managed to register a small gain over the summer months while the small-cap laden Russell 2000 posted a small loss.
Many of the themes we have been highlighting continue to push and pull on investor sentiment. We believe trade-related headlines are proving to be the most influential with daily swings between the prospects of a new cold war with China and hope for a more congenial resolution. We place higher odds on the later, but our patience is being tested. Coming into the summer, our disciplines were tilting positive and we felt the market had room to run. We also noted that while the pace of returns should slow, bear market or recessionary conditions simply were not prevalent (see Trade Tirade here).
Currently, our short-term metrics are bouncing back and forth between positive, neutral and negative (neutral as of this writing). We continue to expect choppy and erratic trading as investor anxiety levels are elevated, particularly surrounding the macro backdrop. Encouragingly, longer-term metrics remain positive. While the S&P 500 is only a few percentage points from another all-time high, there is a noticeable absence of bulls. We continue to note one of the most positive aspects of this market is the overwhelming lack of optimism from investors (e.g. AAII bullish levels are muted, cash levels are elevated, positioning is decidedly bearish, etc.).
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