I was out of commission for a few days fighting a stomach virus so it seems appropriate to review some of the recent market happenings.
The market got a bit of a growth scare last week as several economic data points seemed a bit weaker than expected. The Philly Fed Survey was much weaker than expected and spooked the market quite a bit on Thursday and Friday. The Conference Board also released the Leading Economic Indicators on Thursday which were interpreted as weak. These two reports were enough to worry some that the economy is weakening too rapidly and could fall into recession. The yield curve continued to invert with the Ten Year Treasury note yield falling almost 3/4% below the Fed Funds rate. I must admit that level of inversion certainly makes me nervous. However, without further evidence, we continue to expect a slowdown that doesn't develop into recession.
The market has recovered to new highs for the move this week as consumer confidence and a report from the Richmond Fed cooled the recession fears. The Dow now stands a mere 33 points or so from its all time high. We expect that level to be broken soon, especially with the end of quarter window dressing that is happening this week. For those of you who don't know, window dressing is a practice that happens at the end of every quarter. It refers to the fact that mutual fund managers must reveal their portfolios at the end of every quarter. If it has been an up quarter, as this one has, those portfolio managers don't want to show too much cash on the books lest anyone actually read their quarterly report and complain that they weren't invested enough to take advantage of the rally. The reverse occurs when it's been a down quarter and those same portfolio managers will sell in the last week to make it look like they were holding cash. It's a silly game, but we know it gets played.
So, I was out for a few days, but nothing has happened to change our view. We are still overweight large cap stocks (which have outperformed during this rally) and underweight commodities (which have dramatically underperformed over the last two months). We do expect to see some consolidation of the recent gains in October as the election nears. Some will start to fear a Democratic takeover (although as we've pointed out, that's an unfounded fear) and sell stocks in anticipation. Political prognostication is not our area of expertise, but with the way incumbents have twisted the system in their favor, we don't think a huge turnover in Congress is likely. We think there is still upside to the market once the election is out of the way.