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November 2019 Market Update & Outlook

By December 3, 2019No Comments

Monthly Recap

November marked a continuation of the impeachment hearings and Hong Kong unrest, Michael Bloomberg throwing his hat in the 2020 Presidential race and a house bill decriminalizing marijuana federally. However, the US equity markets saw solid returns with the S&P returning over +3.5%, while international and emerging markets posted modest gains or were flat. Diversified portfolios continued to struggle vs. the S&P 500 since we saw bond and commodity markets pull back. The US large cap indices continue to be a bright star in the equity markets, although things don’t last forever and diversification should not be abandoned.

As always, below is a recap of November’s noteworthy events:


  • Testimony by various people (Gordon Sondland, Kurt Volker and many others) painted a clear picture of a quid pro quo whereby the president withheld military aid for Ukraine investing Hunter Biden’s (Joe Biden’s son) involvement with a Ukranian gas company.
  • Rudy Giuliani said his controversial work with Ukraine — now at the center of the House impeachment probe — was done “solely as a defense attorney” for President Donald Trump, undercutting the administration’s claims that the former mayor was advancing U.S. foreign policy. We’re still unsure of why Giuliani was as involved as he was as new details continue to emerge each day.
  • The trouble in Hong Kong is intensifying: The death of a protestor spurred escalating violence, as demonstrators set one man alight while police shot another.
  • The unrest in Hong Kong is taking a notable toll on economic health (distant second to human rights imho).  Third quarter GDP fell by 2.9% year-over-year, the sharpest contraction in over 10 years.
  • Meanwhile, the U.S. Senate unanimously passed a bill Tuesday aimed at supporting protesters in Hong Kong and warning China against a violent suppression of the demonstrations. President Trump ended up signing the bill into law as well which concerned some that China may retaliate as we’re trying to finalize phase 1 of a long awaited trade agreement.
  • Former New York Mayor Michael Bloomberg announced he is running for the Democratic presidential nomination, offering his own mix of moderate policy stances and experience in business, government and philanthropy as the way to beat President Donald Trump.


  • A first phase trade deal with China appears to be nearing completion. Positive momentum seemed to be one of the reasons why the stock market was well bid during the month.
  • Federal Reserve officials stressed that risks to the U.S. economy remained elevated as they agreed to put interest rates on hold following their third cut this year. Federal Reserve Chairman Jerome Powell called the U.S. economy a “star” performer and voiced solid confidence that its record expansion will stay on track.
  • KKR & Co. has formally approached drugstore giant Walgreens Boots Alliance Inc. about a deal to take the company private, in what could be the biggest-ever leveraged buyout. Walgreens Boots has a market value of about $56 billion and $16.8 billion of debt. At that size, a take-private of the company would top the largest leveraged buyout in history: the 2007 sale of utility TXU Corp. to KKR and TPG, which was worth about $45 billion including debt.
  • WeWork’s bonds are falling deeper into distress as the company’s $669 million of notes due in 2025 dropped more than 3 cents on the dollar to about 71 cents. That pushed the yield on the debt to more than 16%. Later in the month, they announced 2,400 layoffs globally to reduce expenses which was widely expected.
  • The House Judiciary Committee approved a bill that legalizes marijuana on the federal level, removing it from Schedule 1 of the Controlled Substances Act. The legislation, which passed 24 to 10, has a high chance of approval in the full House where Democrats control the chamber with 234 seats. It’s likely to face a tougher battle in the Republican-controlled Senate, where Majority Leader Mitch McConnell opposes marijuana legalization. The legislation allows states to enact their own policies and gives them incentives to clear criminal records of people with low-level marijuana offenses. It also includes a 5% tax on cannabis products that would provide job training and legal assistance to those hit hardest by the war on drugs.
  • Elon Musk and Tesla revealed their new Cybertruck to great fanfare. And even though the windows malfunctioned when smashed with a sledgehammer, they still received over 200,000 pre-orders in a few days.
  • The U.S. budget gap grew 34% in the first month of the fiscal year as federal spending outpaced revenue growth, pushing the 12-month deficit past $1 trillion for the first time since February 2013. The government ran a $134 billion budget deficit in October, the Treasury Department said. Federal outlays totaled $380 billion, an 8% increase from a year earlier and a record for the month, driven by higher spending on the military, health care and Social Security.
  • From rural bank runs to surging consumer indebtedness and an unprecedented bond restructuring, mounting signs of financial stress in China are putting the nation’s policy makers to the test. In its annual Financial Stability Report, China’s central bank described 586 of the country’s almost 4,400 lenders as “high risk,” slightly more than last year. It also highlighted the dangers associated with rising consumer leverage, saying household debt as a percentage of disposable income jumped to 99.9% in 2018 from 93.4% a year earlier.

My 2 Cents

Morgan Stanley issued a notice/report in early November that they see market returns tumbling over the next 10 years. Some highlights of the report were:

  • A traditional 60/40 portfolio mix of U.S. stocks and government bonds is likely to have returns over the next decade that fall to close a century low.
  • A 10-year annual return of 2.8% over the next decade for a portfolio that is 60% stocks and 40% bonds
  • The report does see higher expected returns in several markets outside the U.S. Those include emerging market equities, which they forecast will have an annual return of 7.9% over the next decade on a real basis. They expect European stocks to return 5.4% annually, and Japanese stocks to reach nearly 6% a year.

The reasoning behind their analysis is simple: with equity valuations sky high in the US and bond yields incredibly low, returns have to come down. If you study market returns, the greater predictor of future returns is the current valuation. If you have a return target of 7% and own 40% of bonds in your portfolio yielding 3% and 60% in stocks, the stocks would need to earn an average annual return of just under 10% to achieve the 7% return target (assuming the bonds only produce interest and not a capital gain or loss). Given current valuations, that’s being wishful in my opinion. So expectations for future returns will likely have to decrease as well as retirement withdrawal rates. More to discuss on this topic in a separate blog post later in the month.

Charts, Commentary & Perspectives

(In no particular order)

Keeping this section short this month since I’m working on a longer post on what to expect in 2020 and beyond.

The MSCI World ex US is trading at a 20% discount to US stocks. If you’re looking for more reasonable valuations by PE ratio, international and EM seem to be priced more reasonably for returns over the next 5-10 years.
Measuring valuations by P/B ratio, Europe specifically is the cheapest it’s been since 1988.
Our farms are in trouble and dare I say our national security. I believe it’s in our national security to be able to produce enough food to feed ourselves. Farm sector debt is reaching new highs while the sector’s working capital has been dropping. I won’t get started since this post will turn into why we need to change our farming system from traditional monoculture to diverse regenerative ag practices. I’ll stop here…
Value has never been as cheap vs momentum. Not a bad time to tilt your portfolio in that direction. However, if you look at when this was the case in previous cycles, this at the market bottom (2003) and in the middle of the financial crisis (late 2008). So not necessarily a common theme.
The Atlanta Fed is not expecting much out of the US economy in Q4. Current predictions for GDP are currently below .50%.
Speaking of GDP, Germany barely missed being in a technical recession by posting a very slightly positive Q3 GDP.
Deutsche Bank came out with their 20 risks to markets in 2020. However, all of these are known and dare I say uninspired. They don’t mention global warming contributing to more potential natural disasters, forrest fires in California or anything that isn’t a known known. Nothing listed here should be a surprise to anyone.
Oops, we did it again. The top 10 metros with highest risk (according to this chart) of a housing downturn in a recession were at the forefront (mostly) of the last housing downturn. And who says history doesn’t rhyme.
We’ve looked at this chart in the past and it’s only getting more extreme. This looks at corporate debt to GDP and you can clearly see the ratio climbs until it hits a peak and then falls during a recession (or is a potential cause of the next recession). What we don’t know is where the peak is and they’ve only been going higher after each recession on this chart.
The # of BBB rated companies is hitting new highs. Why does this matter? This is the last rung before debt is rated junk which can cause forced selling. There are funds and institutions that are not allowed to own any or certain amounts of high yield debt and if these bonds are downgraded, forced selling can occur. Furthermore, it simply shows that there’s a lot of borderline investment grade/high yield debt in the markets relative to the total which is a sign of credit issues (imho).
Since the late 1990s, the total number of listed companies on the New York Stock Exchange, NASDAQ and Amex has dropped from approximately 8,900 to 4,828 as of November 8, 2019. This is due to M&A activity, fewer companies wishing to go public, and a record level of corporate share buyback campaigns over the last 10 years. There are simply fewer tradable shares available for you and me to buy. This reduces diversification and increases concentration in the indices we are all buying.

I hope you enjoyed this months financial markets update.  If you have any questions please contact us directly.  If you’re interested in a topic that you’d like us to address, please email us so we can include them in future updates.

If you’re interested in starting a dialogue and learning how we can help, please contact us.

Best Regards,

Jared Toren
CEO & Founder

Sources: Edges & Odds, WSJ Daily Shot, 361 CapitalSteve Blumenthal’s On My Radar

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