(Beijing)

New data out of China suggests all is not well. A gauge of Chinese factory output fell to its lowest level in two years. The news arrives at the same time as the country is in a bear market. The data is particularly important because it shows the China’s economy is under pressure from US tariffs even if the direct effect has not showed up in trade data yet. One Chinese economist for ANZ Bank says “The economic conditions facing China’s private sector is much worse than what the headline figure suggests … Besides an expected reserve requirement ratio cut next January, we expect future supportive policy actions to be measured. The government’s priority is to avoid a financial blow-up”.

FINSUM: We think China is going to once again undertake stimulus measures to support the economy, but this time they will be facing a less accommodative trade environment.

(Shanghai)

If you or your clients own any Chinese focused ETFs, you will have noticed a glaring fact—they have hugely variant returns even when the underlying holdings don’t seem that obviously different. China is a study in how different index weightings and configurations can impact returns. For instance, Chinese stocks as a whole have fallen 21% this year, however the 40 or so Chinese focused ETFs in the US market have ranged from a 5% positive to negative 40% return. Even seemingly broad ETFs, like the iShares Large-Cap ETF, have very varying results, as despite the 21% fall, that ETF only dropped 13%. This is because it has a 50% weighting towards financial stocks, which were largely unscathed.

FINSUM: The key point here is to know what you are buying. Each of the indexes being tracked are quite unique, even if you think you are just buying a broad “China ETF”.

(New York)

For the first time in over a decade, Wall Street is giving more to the Democratic party than the Republican party. For the last ten years, big Wall Street banks and financial houses have leaned towards giving more to Republicans, who had a more favorable policy agenda. However, the pendulum seems to have swung the other way on the back of the kind of disruptions some current Republican policies may bring to bear (e.g. trade war). Bankers themselves are also giving more to Democrats.

FINSUM: Bloomberg framed this giving as an attempt by Wall Street to “soften a blue wave”. That sounds like a fair characterization to us—Wall Street wants to make sure to soften the hard edge of some possible forthcoming democrat policies.

(New York)

Is there gain ahead or pain ahead? That is the question on every investors’ mind. Well, Morgan Stanley has an answer. The bank’s chief US equity strategist, Michael Wilson, says that the answer is more pain. The bank thinks we are in a “rolling bear market” and that stocks will reach bear status soon. “We think we get there in four to eight weeks”, says Wilson. The bank defines a bear market as a drop of 20% or more with no recovery for 12 months. “Risk-reward remains unattractive for us”, he added.

FINSUM: Morgan Stanley thinks a lot of these losses come down to the change in central bank policy. We agree with that but we also think investors are just anxious about what lays ahead in terms of a possible recession, trade war, and beyond.

(New York)

Goldman Sachs thinks this selloff is “overdone” and that a rally is coming. The bank thinks the current market presents a good buying opportunity and forecasts the market to rise 7% before the end of the year. According to the bank “The recent sell-off has priced too sharp of a near-term growth slowdown. We expect continued economic and earnings growth will support a rebound in the S&P 500”. To play the rebound, the bank says to look at stocks in its “high quality” basket. These include: Mastercard, Cognizant Technology Solutions, Alphabet, Accenture, Ansys, C.H. Robinson Worldwide, Edwards Lifesciences, International Flavors & Fragrances, and Ross Stores.

FINSUM: That is a very wide selection of choices, but more interesting to us is Goldman’s view on a recovery. We agree that this selloff seems to be an overreaction relative to the fundamentals.

(Washington)

The GOP seems to be on its back foot heading into the midterm elections and that has the party nervous. The political bombing attempts and the synagogue horror have both sent Trump’s approval rating sharply lower. Now the party is worried that pre-Trump Republicans in affluent suburbs may not show up to vote, which is making them worry they may lose more ground than forecast. According to polls, this group of affluent long-term Republicans has a lower overall interest in the midterms, which may sap much needed votes against the more motivated Democrats.

FINSUM: This is a problem in itself, but the fact that the midterms have become so much of a referendum on Trump at the same time as his approval rating is falling is not a good sign for the party.

(Chicago)

In 2010, Meredith Whitney, famed market analyst, made a bold call that still haunts her and the muni market to this day—that there would 50 to 100 sizable defaults in the next year. The call, which came on 60 Minutes in 2010, led to a major backlash by the muni market. Besides Detroit and Puerto Rico, which were widely forecasted, her predictions never came true, or at least were certainly far too early. To this day, many of the problems that haunt the muni market, like shrinking populations in indebted areas, are still definitively long-term issues that are not going to immediately take down the market. Even the pension deficit is not as bad as many perceive, with a 71% funded ratio on average (economists say the optimal number is 80%).

FINSUM: The muni market gets a lot of bad press, mostly because of the handful of dire situations, but on the whole it has been quite steady.

(New York)

If you think the market has been bad overall, take a look at the asset management sector, which has been brutalized in the last few weeks. The S&P index of asset managers has fallen 14% this month, compared with a 9.3% drop for the market overall. That adds to a lot of pain already this year—the index has lost almost 25% of its value in 2018 and is headed for the biggest loss since 2008. Some, like leader BlackRock, have been hit very hard just this month with shares down 17%.

FINSUM: Weak fees and poor fund flows are the immediate problem, but they are a major issue because they support investors’ fears of disruption in the industry.

(Berlin)

In what could be a sign of a looming recession in Western countries, the EU just released its worst GDP figures in four years. The third quarter produced just 1.7% growth across the EU, the worst number in four years. The pace slowed from the second quarter, when growth was at 2.2%. Oxford Economics commented on the numbers that “‘temporary factors’ have been overplayed to justify the slowdown in the eurozone economy at the start of the year, and that risks are clearly skewed to the downside.” Notably, Italy produced no GDP growth in the third quarter.

FINSUM: We wonder if this is a case of the EU suffering its own problems, or whether it may be systemic and spreading.

(Washington)

Just when it finally felt like it was gone, the fiduciary rule appears to be back from the dead. Not only is the DOL working on a new version to be debuted in 2019, but it is reportedly enforcing the current version intensely. According to ThinkAdvisor, “attorneys with Drinker, Biddle and Reath report that both the Labor Department and Securities and Exchange Commission are leveraging enforcement initiatives at a historic level of tenacity”. Fred Reish, top industry lawyer concurred, saying “Now that the fiduciary rule has been terminated, I think the focus at DOL is more on enforcement”. In terms of how the DOL is opening up investigations, a partner at Drinker, Biddle & Reath says that “They start with ‘hello, we are the DOL, show us how you do ERISA,’ and from there take a very broad based approach”.

FINSUM: We are confused by what is going on at the DOL. Following Trump’s appointment of the new chief at the DOL there seemed to be a hands-off approach being adopted (e.g. not pushing the rule further in court). Now everything seems to have reversed. Stay tuned.