The Markets – The S&P 500 index finished October -6.97% bringing the year-to-date return to +1.43%. The Dow was -5.07% for the month bringing it to positive territory year-to-date at +1.60%. The NASDAQ finished the month -9.20% and year-to-date +5.83%, according to the Wall Street Journal.
Money managers are taking the “America First” philosophy to the stock market. Money manager allocations to U.S. stocks are at the highest level in three years, according to research from Bank of America Merrill Lynch. As professional investors turn their back on Europe and emerging market equities, it raises questions about what’s causing this sudden shift. The overriding reason so many institutional investors are flocking to U.S. stocks is a simple one – the profits are larger on the U.S. corporate landscape. Avoiding companies and industries potentially impacted by ongoing trade wars is another institutional investment strategy right now. The current fiscal and trade policy adopted by the White House has led to a global landscape in which domestic investing seems safer. Changes in economic policy – especially here in the U.S. – are also driving investors away from overseas stocks and emerging markets, and toward domestic stocks. The preference of U.S. assets over international assets is due to the enormous pro-growth improvement in government tax and regulatory policy in the U.S. since the presidential election in 2016. Looser regulations here in the U.S., especially compared to Europe, also play a role in portfolio assets being steered toward the U.S. According to a recent article in Forbes, “the overall flow of economically significant rules is around 27 percent lower than Obama’s last year in office”. This bodes well for U.S. firms — especially when compared with the current regulatory environment in Europe.
Perhaps the most common question or concern recently has something to do with how the markets act around mid-term elections. At the end of the day, as we have said many times previously, the market’s volatility is most often driven by headlines while the market’s long term results are driven by corporate earnings. There are numerous studies that show, historically, it really doesn’t matter who wins the House and Senate, the market will follow the corporate earnings over time. The volatility has more to do with the market “not knowing” than the actual results. The market likes certainty rather than uncertainty. Once the election is past, the House and Senate races will be known and the market will again focus on earnings and the prognosis for future earnings.
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