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Welcome to November.  As widely noted October was the worst month since 2011.  Will the rout continue?

Many times I have commented about the massive imbalances in the markets.  It appears every aspect of the market—compliance, trading, portfolio management, etc.—has gravitated to passive/index investing where by definition past performance is indicative of future performance.

The issue at hand is the massive changes that have occurred, changes that have radically altered the geopolitical and monetary landscape.  In my view these changes are now just beginning to be reflected in the indices.

I reiterate my long held view the indices will mark time at best over the next several years.  Individual equity selection will be pivotal and income will again become the predominate return component as was the case from 1900-1996 when income not capital appreciation (i.e. multiple expansion) was 70% of equities’ returns.  Since 1996 approximately 70% of the equity returns were via multiple expansion.

Tomorrow is the release of the BLS employment report. Yesterday’s release of the private sector ADP report suggested the possibility of an upside surprise.  If the data is stronger than expected, the odds the economy continues to accelerate increases. So do the odds of inflationary pressures rising.

A reason for October’s rout was the realization that monetary policy is moving closer to neutrality.  In my view markets have not yet begin discounting a tightening environment.

Radically changing topics, at the close today Apple’s earnings are released.  How will the results be interpreted?  A strong case can be made if results disappoint, the rout in FAANG could continue.  Conversely if profits exceed expectations, the current rebound in FAANG could gain momentum.

Last night the foreign markets were up.  London was up 0.45%, Paris up 0.37% and Frankfurt up 0.78%.  China was up 0.13%, Japan down 1.06%  and Hang Sang up 1.75%.

The Dow should open nominally higher on earning and economic optimism.   The 10-year is off 4/32 to yield 3.17%.

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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.