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Has there been a massive change in sentiment?  Small investors are the most bearish since mid-2013, a bearishness captured by the record outflow of $46 billion from US mutual funds and ETFs.  There was also a near record outflow of $13 billion from bond funds.

Monies are gravitating to cash equivalents given the 6 month treasury is yielding around 2.5%.  This should not be a surprise given the 1.98% yield on the S & P 500.  Historically when short dated Treasuries yield more than the S & P 500, volatility rises.

As written last month, the retail investor was buying shares that the institutions were selling, an environment that Blackrock discussed in its third quarter earnings report.

Tomorrow the FOMC is expected to increase rates for the fourth time this year.  I will argue if the Committee decides otherwise, volatility will rise further under the simple guise that the “Fed might know something that we don’t know.”

Markets fell again Friday even as US data indicated strength in the American consumer and positive trade developments. Retail sales data is suggesting the economy is expanding over a 3.0% rate.  Before the data was posted, consensus was forecasting a sub 2.5% fourth quarter pace.

The sour mood was the result of slowing growth in both China and Europe.  As I noted Friday, China is an export denominated economy thus by definition is more sensitive to trade wars.  I rhetorically ask is this why China is changing its position?

Europe, specifically France, is now experiencing the economic impact of the “Yellow Vests.”

Equities were also shaken by a 10% or $45 billion decline in Johnson and Johnson, the result of resurging liability fears surrounding its manufacturing of talcum powder.  Its shares fell by the greatest amount since 2002.  Will its bonds now come under pressure?  JNJ is one of the remaining two triple AAA rated companies remaining.  The other is Microsoft.  Exxon lost this coveted rating in 2016.

Radically changing topics, according to the WSJ, since 1993 the administrative state (i.e. Washington Bureaucracy) has issued 100,000 rules and regulations, and no fewer than 3,000 a year.

This avalanche of rules and regulations is beyond the ability of Congress and the President to control thus challenging the rule of law.  The framers of the Constitution saw in their own time that tyranny resulted when the same person or institution held the power both to make laws and to enforce laws, people/organizations that were not elected by the people and had no accountability.

In my view, the Administrative State and the fear that it projects is a major reason for anemic growth.  Most decision makers are afraid of their own shadow, fearing the long arm of government.  Is this about to change via a possible Supreme Court ruling that could curb this power?  I hope so!

The economic calendar is comprised of various manufacturing indices, personal spending and income and housing statistics.  How will the data impact perceptions?

Last night the foreign markets were mixed.  London was down 0.44%, Paris down 0.57% and Frankfurt down 0.42%.  China up 0.16% was Japan up 0.62%, and Hang Sang down 0.03%.

The Dow should open steady. The 10-year is up 2/32 to yield 2.89%.


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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.