“WHERE TO?”

Where to?  During the last 45 days it appears everything is going wrong at once.  Commodities led by a record plunge in oil, have been crushed.  In equities, the FAANG complex is down about 25%.  Debt markets have been rattled by the turmoil engulfing GE and PG & E.  Goldman had its worst week since 2016.

By themselves, none of the above would be enough to incite panic but the issue at hand is every strategy appears to be failing at once, generating losses anywhere between 10% and 60%.  According to Bloomberg, in a little over a month the S & P 500 has fallen five days in a row three different times, the first time since at least 1984.  The NASDAQ 100 is at risk of dropping a record three straight months.

The risk of contagion is understood but what is not understood is where and how connected things are.  Just about anything can create a panic and it does not necessarily have to be something that makes sense.

In my view the global nervous system connecting modern markets, the synapses are misfiring.  However I think this is the result of the massive proliferation of indexing and passive investing.  This strategy requires no skill or analytical thought and the performance of the last five years border on the remarkable.

Indexes/passive investing are great at reducing costs by taking out industry mark ups until they become a significant portion of the market itself and then they pose a systemic risk.

I believe this is where we are today.  Unfortunately using history as a guide, a bottom will not be found until there is panic virtually everywhere.  Cracks today are now becoming fissures and a case can be made these fissures are edging closer to causing a collapse of the current market philosophies and trading patterns.

It is at this juncture the individual who has a macroeconomic and geopolitical thesis, one who poses forward looking thoughts backed by analytics will resurface and will mark the start of another era.

This is a holiday shortened week.  Data released before Thanksgiving include several housing statistics, manufacturing data and sentiment indicators.

Last night the foreign markets were up.  London was up 0.66%, Paris up 0.02% and Frankfurt down 0.19%.  China was up 0.91%,  Japan up 0.65% and Hang Sang up 0.72%.

The Dow should open moderately lower for a myriad of issues including trade, the arrest of Renault’s President, monetary angst and general evolving fear that nothing is acting as the financial alchemists had suggested. The 10-year is off 5/32 to yield 3.09%.

 

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.