China trade, Fed, and political anxiety, yet all was good for September

There were anxieties concerning the ECB, the Fed, trade, and politics but risk-on behavior still drove performance for the month. Some better than expected economic news with liquidity proves to be a balm for what ailed markets in August. The September month-end return numbers do not provide any view into the difficulties faced by investors.

The ECB reigniting their bond buying programs and the Fed cutting rates provided the expectation of more liquidity. Even with some concerns by central bankers, the bias to fuel growth with liquidity continues. Along with political pressure, the Fed is being driven by pressure from other central banks cutting rates around the world. Being a central bank outlier is not easy.

The on-off trade negotiations have continued to grab headlines although tariffs are taking a backseat to growth issues in China. While option volatility has declined, political uncertainty measures continue to move higher. Investors seem to be immune to political headline uncertainty. Noise has drowned out any signal concerning government actions, the markets view that these issues can always be addressed in the future.

Whether an oil price or a repo funding shock, markets do not seem overly concerned about existential risks that can have strong ramifications for future cash flows. The Middle East uncertainty is not going away and disrupted oil logistics even in a heavily supplied market will impact many countries and firms. The repo funding crisis has generated significant complexities for investors. In spite of trillions in excess reserves, funding seems constrained and needs Fed action. Whether caused by bank liquidity reserve constraints or large Treasury debt funding, the plumbing of US money markets is under stress and that affects both the real and financial economy. 

Finally, the WeWorks debacle should not be viewed as an isolated incident, but suggestive of a deeper problem between private and public markets. Firms that IPO are now put up to the light of public scrutiny, and price is determined everyday in the marketplace by the marginal buyer. If the firm does not make money, stockholders will make management and the price pay for their mistakes. It will be harder for private companies to come to market and ask for a premium when investors are just looking for cash flow.