After a volatile August, equity markets stabilized post-Labour Day to move higher for the month. Fears of a recession following the yield curve inversion appear to be unfounded as risk appetites improved for all asset classes.

While markets moved broadly higher, an interesting event occurred as leadership flipped from growth to value. The safety trades of gold and defensives paused their advance in favour of more cyclical areas, such as financials and energy. Whether this proves to be a temporary event or the start of a more significant trend is yet to be seen.

Big tech, loosely defined as the FAANG stocks, appears to be under attack from a variety of directions, be it regulators or slowing demand. Big tech has been winning for too long and we may be finally starting to see the first steps in a shift away from these giants.

Throughout the summer, the headline market moves happened in the bond market, not equities. The inverted yield curve and sudden decline in yields signaled an ominous risk of a global slowdown. But in September, a combination of stronger data in the Americas and globally reversed this course. Throughout the month, the yield curve normalized and we saw the benchmark US 10-year Treasury yield move back towards the 2% level, where it was prior to the Federal Reserve’s July press conference, which seemed to cause much of the angst we saw in August.

September also saw a further rate cut from the US central bank, which was widely expected. While the debate continues as to whether this is a mid-cycle adjustment or the beginning of a new easing cycle, what is clear is that the current US president is more involved in US monetary policy than any other in recent memory. Markets continue to be data dependent, but until further notice, the bias remains lower for rates and potentially yields.

Trade is still the primary focus for investors. It appears we may be getting closer to a deal. However, while volatility has increased throughout the year and the cycle continues to age, there is a risk of going too defensive too soon and missing out on another leg higher, if a broad trade deal is reached.

October has seen its share of wild market moves in the past and the setup this year is no different. Markets, while higher on the year, really haven’t moved much on a year-over-year basis. They’ve had difficulty breaking through to new highs. Earnings season will be important this quarter to hear if trade tensions have impacted business operations to the degree that investors have been anticipating.

This isn’t the point in the cycle to be taking on risk or extending exposure to volatile parts of the market. There may be one more move higher left in this bull market on a positive trade deal. Whether it’s worth it to hang around for the final celebration or hit the exits early is a difficult call. Unfortunately, more than ever, it’s in the hands of politicians rather than economists.

Ideas with Purpose

Purpose Tactical Asset Allocation Fund (RTA) – Economic data and political headlines these days are flipping between positive and negative sentiments more frequently. That makes broader asset allocation a much tougher task. RTA can help take a lot of that burden off your shoulders by automating much of the process, thanks to its systematic model that analyzes a whole host of economic and market indicators.

Purpose Specialty Lending Trust – With volatility higher in public markets, private assets are a very attractive source of alternative returns. Private debt features very low correlation to traditional assets and heightened yields thanks to the illiquidity premium. Purpose Specialty Lending Trust is Canada’s first global multi-manager private debt fund. It’s also the easiest way for Canadian investors to access a favoured asset class of pensions and institutions.

— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments

All data sourced from Bloomberg unless otherwise noted.

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