Spruce Index Returns October 2018

In October financial markets sold off broadly with global stocks declining -7.49%, bonds -0.79%, and commodities down -1.97%. The United States, previously a safe-haven from imploding overseas markets, finally capitulated with the S&P 500 Index declining -6.84%. The leading losers were energy, industrial, small caps, and consumer discretionary which lost -11.33%, -10.87%, -10.86% and -10.10% respectively. Technology shares lost -8.00% while utilities saw gains of +1.98%. Click here to view full Spruce Index Returns October 2018.

Momentum stocks declined -9.90% whereas value stocks lost a more modest -5.41%. Quality and dividend stocks also declined -7% and 5.4% respectively.

Overseas, already hard hit regions and countries saw additional losses with developed countries in the EAFE Index falling -8.15%, and emerging countries losing -8.71%. China led the selloff -11.33% as their economy continues to soften, trade slows, and policy responses remain muted. Brazil by contrast gained +17.76% following the presidential election of far-right candidate, Jair Bolsonaro, who ran on an anti-corruption message.

In commodities, natural gas and Brent crude oil declined -12.61% and -11.07% on growing supply and peaking global growth. Gold finally acted as a safe haven gaining +1.24%, something it has failed to do in recent market corrections.

The yield on ten-year Treasuries remained solidly above 3% at 3.06%, up from 2.38% a year ago. It can now be viewed as a fact, yields are solidly on the move and rising higher. Credit spreads on BBB bonds widened very slightly to 2.34% but still pale in comparison to 3-5-10 year historic spreads of 4.05%, 3.68% and 9.21%. While the bond market appears to be moving in response to Federal Reserve interest rate increases and government deficit spending, the credit markets have hardly budged and appear to be signaling all is well with the economy (that can change suddenly without notice).

Yield curves as mentioned above, widened with the 30-year minus 2-year spread rising above 50 basis points. Equity market valuations declined as the market sold off with the S&P 500 P/E ratio at 19X, a level last seen in early/mid-2016 but still higher than its historical average.

Financial conditions in the United States appears to be in the early stages of modest tightening and economic surprises are currently neutral level. In emerging markets and Asia in particular, financial conditions continue their dramatic straight-line decline, and economic surprises are neither positive or negative. Emerging markets and Asia will remain under economic pressure as long as the Dollar continues to strengthen.

Overall, growth and corporate earnings in the United States remains strong, in direct contrast to the slow-motion meltdown in emerging markets. We believe the current selloff is a correction and not the beginning of a bear market or recession. That being said, we also believe the equity bull market is on its last legs with higher interest rates, slower global growth and possible wage inflation in 2019.