Kim Bolton, president and portfolio manager of Black Swan Dexteritas 
Focus: Technology stocks

MARKET OUTLOOK

The fall season can be known for turnarounds and turbulent times. While this October and November were not particularly volatile, the stock market did produce a reversal. As market participants were looking ahead into the fall season, not many concluded we would see new highs. The trade skirmish was still a major worry, and then we saw ISM manufacturing fall to its lowest level since 2009. 

Of course, once any investor sees or hears “2009,” they invariably have nightmares. Meanwhile, third-quarter earnings season seems to have met expectations with a decrease of 0.5 per cent from Q3/18 and corporate America’s outlook is still cautious for the remainder of 2019 and the first half of 2020. 

This less-than-bullish background raises the question of what the catalyst for this melt-up was in the stock market and the steepening yield curve. The answer, in retrospect, is the liquidity infusions from the balance sheets of the G5 central banks (the Federal Reserve, European Central Bank, Bank of Japan, People’s Bank of China and Swiss National Bank). 

Federal Reserve officials had been working feverishly to address issues that popped up more than a couple of months ago in the overnight bank lending market. In early October, the New York Fed undertook limited initial repo operations which allowed Treasury cash balances to rise and the level of commercial bank reserves to recede. Not long after that, the Fed announced a new quantitative easing program to the tune of $60 billion a month starting Oct. 15, which provided even more liquidity in search of returns. 

With global bond yields at historic lows, this new cash fueled the global stock market rally. As with any rally to new highs, we have to keep in mind these gains have left most major stock markets at short-term overbought levels. For example, the forward four-quarter (Q4/19 to Q3/20) price-to-earnings ratio for the S&P 500 is 17.8, versus the historic P/E mean of 15.76.

UPDATE: Sold Universal Display for $207.60 after buying it at $96.70. The stock achieved our price target and we took profit.

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