During September the Standard & Poors 500 Stock Index rose 1.7%, bringing the year-to-date return to 18.7%. The Index was not as volatile as during August, but it was up and down with significant intraday moves. Historically, September, and particularly October, have been volatile months, and this year may reflect that pattern as well. The US economy has continued to slow, with growth in consumer employment, incomes, and spending offsetting the deepening recession in manufacturing. Exports also continue to lag due to the strength of the Dollar and the economic weakness in China, Europe and Japan, and disruption caused by BREXIT. The trade war with China drags on, as it has for several months with no resolution, not even a limited agreement, anywhere in sight, and most likely not before next year's presidential election. The domestic political situation has also contributed to market volatility which will likely continue, given the emerging candidacy of Elizabeth Warren as well as the attempt by Democrats to impeach the president. (Recently, there has been a backlash among big donors from Wall Street. They are concerned that Warren is a candidate with firmly held views and principles which she is unlikely to compromise. Were she to be elected, the repercussions for American capitalism and equity values would not be good, to say the least.)
By the middle of October, most constituent companies of the S&P 500 will be reporting third quarter revenues and earnings. With one notable exception, our portfolio companies exceeded analyst expectations in the second quarter, and we are hoping for similar results this time around. Nonetheless, market turbulence is to be expected during the reporting season. Managements' forward guidance will, as always, be important. We are encouraged that, globally, inflation remains low and financial system liquidity plentiful, as US money supply (M2) growth is running at about a 7% annualized rate, well above an approximately 4% nominal GDP pace. Both 10-Year Treasury (1.7%) and BBB bond yields (3.9%) are extremely low, and High Yield bond spreads are tight. A global monetary easing cycle is now underway, which in time should improve overall economic activity. As we noted a month ago, equities are not particularly cheap, but in the current environment they do not seem dangerously overvalued. We have raised our cash positions and will continue to operate defensively until there are convincing signs that economic growth is re-accelerating.
