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As widely noted many hedge funds and quantitative investors are on the sidelines because of market volatility.  This pessimism has also spread to ETF investors for they have yanked about $4 billion from funds thus far this year.  Bloomberg writes that this is unusual given that asset flows for the group have not moved in opposite from the market in more than a decade.

Can we suggest that geopolitical issues are finally taking their toll upon this huge cadre of investors?

Speaking of politics, what words can I use to describe Washington?   Life is indeed stranger than fiction.  Regardless of one’s political views, the dysfunctionalism in Washington is horrific and is perhaps now beginning to impact investor psychology.

Bloomberg writes that since the beginning of the year approximately 90% volume is the result of algorithmic and technology based trading; trading based upon momentum and capitalization not any macroeconomic or geopolitical thought.  Wow!

Speaking of volatility yesterday was again volatile with all averages opening higher by 1%, because of earnings.  Mid-day the indices declined over 1% on growth fears and the 50 day moving average for the S & P 500 was breached as selling accelerated.  However just as quick as shares fell the S & P rallied.  At the close the NASDAQ was flat, the S & P 500 up 0.22% and the Dow up about 0.70%.

Commenting about the annual economic forum in Davos, it appears all participants are defending the global order.  This should not be a surprise given the billions spent and legislation passed to ensure perpetuity.  However democracy is intervening.  Economic nationalism is surging in most western democracies, democracies that represent about 70% of global production.   President Trump is a symptom of today’s environment, not the cause.

The cause in my view is income inequality and the heavy burden of the bureaucratic state that believes their views are omnipotent and omniscient to that of their constituents.

Wow!  We are living in tectonic times!

What will happen today?

Last night the foreign markets were mixed. London was down 0.09%, Paris up 0.84% and Frankfurt up 0.55%.  China was up 0.42%, Japan down 0.09%  and Hang Sang up 0.42%.

The Dow should open flat ahead of downbeat comments from Davos where the world’s elite are gathered defending the current economic order, an order that appears in global disarray.  The ultimate reality show in Washington is continuing.   And then there are earnings and trade, the view of each radically changes in a five word tweet.   The 10-year is up 5/32 to yield 2.73%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. 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. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.