TRADE, THE ELECTION, GDP AND INTEREST RATES

Will November’s election become a market event?  A survey of Bank America/Merrill Lynch’s institutional accounts indicated the uncertainty about the upcoming election is a bigger risk than trade.

As noted many times the progressive Democratic mantra is not yet viewed as a serious threat to Wall Street, a view that is perhaps misguided according to Merrill’s survey.   Historically extremist agendas are crushed in national elections pointing to Barry Goldwater in 1960, George McGovern in 1972 and Walter Mondale in 1984 as evidence.

Do the participants in this survey believe a change in sentiment will soon occur?

Speaking of a quickly changed sentiment, Tesla is now the second most valuable car company in the world.  Wow!  Three months ago, The Street thought Tesla was a restructuring candidate.  Shares have since more than doubled, up about 128%.

Wow!  This mania is not as severe as the mania that has occurred in the Treasury/sovereign debt market, a mania that I think almost eclipses the infamous Tulip Bulb frenzy, but is noteworthy in describing the massive influence of momentum/technology-based trading has upon the markets.

Speaking of which, I have commented many times about the inherent risk in the Treasury/sovereign debt and municipal bond markets.  There is still $11 trillion of negative yielding debt, an environment viewed as statistically impossible occurring only 0.001% of the time. The repo crisis has been discussed in depth.

Next week fourth quarter GDP is announced.  About two months ago the Atlanta Fed was estimating a fourth quarter growth rate of 0.3% because of trade concerns, the slowest pace for any quarter since 2015.  Today the Atlanta Fed is forecasting a 1.8% rate with inventories being the largest detractor from growth (inventories have declined and have not been replenished).

Consensus is expecting a 2.1% growth rate.

In my view the biggest issue at hand are yields as the sovereign debt/Treasury market has still priced in sub 1% growth.

In many ways today is reminiscent of January/February 2018.  If growth surprises on the upside, will Treasuries (and equities) respond in a similar manner as February 2018?

Unfortunately, only history will answer this question.

Last night the foreign markets were mixed.   London was down 0.25%, Paris up 0.09% and Frankfurt down 0.29%.  China was down 2.75%,  Japan down 0.98% and Hang Sang down 1.52%.

The Dow should open flat on health fears.   The 10-year is up 5/32 to yield 1.76%.

kent
The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.