Covenant Weekly Market Synopsis as of November 4, 2016

November 7, 2016

It was a tough week all over for financial assets, save long volatility products as the VIX Index (sometimes referred to as the “fear gauge”) jumped 39%. Reflecting fear or, more likely, uncertainty about the upcoming presidential election, equity markets the world over declined between 2% and 3% for the week. Investors shifted from risky assets to traditional “safe haven” assets, boosting the price of US Treasuries (causing yields to decline) and precious metals which saw gold (+2.3%) and silver (+3.8%) rise on the week. Meanwhile, doubts around OPEC’s ability to strike a deal to curb production hit oil prices hard, causing the commodity to decline by more than 9% over the last five days.

For a detailed view of weekly, month-to-date and year-to-date asset class performance, please click here.

Morning Market Update – Following FBI director James Comey’s announcement yesterday that the FBI hasn’t changed its opinion about bringing criminal charges against Hillary Clinton after a review of new emails, markets are in full rally mode. As of this writing, international equities are up more than 1.5%, while domestic equity futures are indicating a similar open for domestic stocks.

Losing Streak – Last week and over the weekend, much was written and broadcast about the recent 9-day losing streak of the S&P 500 (which began on October 24 and appears destined to end today). This is what a 9-day losing streak looks like on a Bloomberg terminal….


…but notice the size of the daily losses (% change column on far right). What most of the talking heads have missed (or intentionally overlooked in an effort to hype the story) is that in spite of nine consecutive down days, the market only declined by a little more than 3%. Hardly a travesty. The last time the market fell for nine consecutive days was in 2008. During that time the S&P 500 fell nearly 25%.



Sources:  Bloomberg and Covenant Investment Research

While 2008 was an extreme event, other drawdowns over similar time frames have been in the range of 8% – 10%. Long story short, heretofore, this move is nothing to write home about. Does it have my attention? Yes. But as for now this drawdown has been particularly mild by historical standards, in spite of its protracted nature. And if today’s stock market futures are an indication, we could recover half that loss today. The big test will come when we learn who will be the next President of the United States and which party will control Congress and the House of Representatives.


“Un”Affordable Care Act – Through September spending on healthcare is up 4.7% year-over-year a 3x growth rate versus overall GDP growth of just 1.5%, according to research from Foleynomics.  Much of the increase in healthcare costs can be tied to the “Affordable Care Act”.  The chart below highlights the trend of rising healthcare spending.



Sources:  Foleynomics and Covenant Investment Research

Skyrocketing healthcare costs may be good for many healthcare companies, but they are bad for the consumer and non-healthcare companies. Higher healthcare expenses reduce the ability to save for the future and cannibalize consumer spending on other products and services.  Thus placing downward pressure on retailers and non-health related services as healthcare costs demand greater “wallet-share” of the average consumer. Higher healthcare costs are also increasing the cost of labor for businesses, which indirectly impacts consumption in other ways, including:

  • In response to rising healthcare costs, business owners and managers are hiring more part-time workers to avoid mandated provision of healthcare for full-time employees. Indeed, part-time jobs rose 90,000 in October and are up 520,000 since August. Part-time jobs pay less in total compensation than full-time jobs, leaving fewer dollars to be directed toward discretionary spending.
  • Unlike their full-time counterparts, part-time workers must pay for their own health insurance either directly through an insurance company or via the Affordable Care Act. Direct insurance has never been cheap and as it has become clear of late, neither is the Affordable Care Act. Part-time workers are being squeezed from both sides, lower overall income combined with higher medical expenses.

The healthcare cost situation is, stated simply, untenable.

Economic Data Wrap-up – Personal Income rose 0.3% in September (vs. expectations of 0.4%), while Personal spending increased by 0.5%.  This monthly snapshot is a microcosm of a four-month trend in which annual nominal personal consumption expenditures have exceeded nominal income growth.  That is to say, people are spending more than they are earning.  This trend is not sustainable in the long run and it may revert in Q4 to drag on consumption.  The October ISM Manufacturing Index rose modestly to 51.9 (from 51.5), yet the forward looking components (new orders and backlog) declined putting a damper on hope that the manufacturing sector will experience breakout growth in Q4.  The ISM Non-Manufacturing Index (aka Service Sector) fell back to 54.8 (from 57.1).  Though firmly in expansion territory (i.e. the index is >50), similar to the manufacturing sector, forward indicators such as New Orders were a little squishy with New Orders falling from 60 to 57.7.

Send all complaints, compliments, criticism and tips to