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Kuby’s Commentary

Headwinds

Oct 1, 2018

Last Week:

The two major near-term headwinds were lightly blowing in the face of investors, with the implementation of tariffs on Monday by the U.S. and China, followed by the Federal Reserve rate hike on Wednesday. Both events were widely expected, and the damage was minimal, with the S&P 500 retreating 0.54% and the Russell 2000 0.92%. Also, as expected, the Fed removed the word “accommodative” from its policy statement. The yield on the Ten-Year Treasury was unchanged, while the Dollar rallied slightly. For the month, the S&P 500 eked out a fractional gain, while the Russell 2000 declined about 2%. It was the best quarter for the S&P 500 since the end of 2013, with a 7.2% return, which significantly outpaced the Russell 2000 return of 3.13%. Growth stocks continued to trounce Value stocks, as the S&P 500 Growth Index gained 9.04% versus 0.90% for the Russell 2000 Value Index. Great weekend of sports with the Bears, Cubs, Trojans, and my fantasy football team all winning. The Cubs still need to beat the Brewers today to avoid being in the dreaded one-game winner-take-all wildcard playoff.

This Week:

The Bureau of Labor Statistics releases the September employment report on Friday, with nonfarm payrolls expected to rise 184,000 and wage inflation forecasted to rise 2.8%. Any major surprises with those numbers would impact the markets. Another closely watch gauge of the economy will be the ISM Manufacturing Index on Monday, which is expected to register at a healthy 60.5 reading. Most of the trade issues remain largely unresolved, and any “progress” will be warmly welcomed by corporations whose supply chains or end markets have been disrupted. With the third quarter earnings season set to commence, I would anticipate some cautionary going forward language by many companies because of these issues. Barron’s summarized “the fog of trade wars” as follows: “Trump signed a free-trade pact with South Korea and pressed Japan to open talks. A deal on the North America Free Trade Agreement with Canada seemed certain to miss a Sept.30 deadline, and the White House threatened to just go with Mexico, threatening supply chains. A promising bilateral deal with the European Union has narrowed to regulatory issues. And China walked from a restart of talks”. (Sunday night an agreement with Canada was reached, although it still needs to secure legislative approval by all three countries. In response, the U.S. equity futures gained about 60 basis points. The real issue remains our relationship with China.) Spoiler Alert: The big loser of these policies is going to be the Walmart shopper as manufacturers will need to raise prices to salvage some of their profit margins.

Stocks in the News:

We only had one company experiencing a double-digit price move, unfortunately to the downside. Salem Media Group, Inc (SALM) -13.4%: Salem Media is a domestic multimedia company with integrated operations including radio broadcasting, digital media, and publishing. The Company has three operating segments, Broadcast, Digital Media, and Publishing. There was no news to explain the decline. Given the media frenzy surrounding Brett Kavanaugh’s confirmation process, one would think Salem’s nationally syndicated network of Christian and conservative programming would have attracted a large audience. SALM is a 1.4% holding in the North Star Dividend Fund and SALM corporate bonds are a 2.4% holding in the North Star Bond Fund.

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