Markets Unsettled as U.S. Election Outcome Certainty Grows

It was a broadly negative week for global markets, with the Dow Jones down 0.73%, the S&P 500 pulling back 1.47% and the NASDAQ down 2.46%. The MSCI Emerging Markets Index also fell 2.54%.

Both Google Inc. (GOOGL) and NVIDIA Corporation (NVDA) also recorded new 52-week highs.

Several of your positions fell below their 50-day moving average and moved to a HOLD. These include Google Inc. (GOOGL), KraneShares CSI China Internet ETF (KWEB), iShares Currency Hedged MSCI Germany (HEWG), Apple Inc. (AAPL) and the BYD Company, Ltd. (BYDDF).

A week from today, we will know who is going to be the next president of the United States. And that outcome has important implications for the behavior of the U.S. stock market in the coming weeks.

Let’s review the current state of play.

Yesterday, the S&P 500 sunk to its lowest levels since July. Because November begins the best six months of the year, multi-month lows at this time of the year are rather rare.

Still, the news isn’t all bad. On the relatively seldom occasions stocks hit three-month lows during November, the S&P rallied over the next month 41 out of 45 days. That’s an impressive outperformance, and suggests that any pullback in the S&P 500 is likely to be temporary.

The spanner in the works this year is the potential outcome of the U.S. election.

Global financial markets always are unnerved by uncertainty. And conventional wisdom dictates that a potential Trump presidency represents just that.

In yesterday’s edition of The Global Guru, I discussed six predictive analyses with long track records that all portend a Trump victory. I also wrote that I expect the market to sell off 10-15% if Trump does pull out a victory. Finally, I provided three specific recommendations on how investors could profit from the markets’ sharp, short-term moves.

A still-unexpected Trump victory would have negative short-term implications for your Alpha Investor Letter portfolio. Conversely, positive market reaction to a Clinton victory would be more muted, as investors would view it as a third term of an Obama presidency.

If Trump does pull off a victory, I expect market reaction to be similar to what it was after the June 23 Brexit vote. In such an event, watch for a sharp sell-off followed by a strong recovery.

As always, keep an eye on your stops. We can always re-enter positions when the dust settles.

Portfolio Update

Markel Corp. (MKL) lost 2.63% last week. Markel reported third-quarter 2016 earnings per share (EPS) of $5.60 vs. the analysts’ consensus estimate of $7.68. MKL did beat on revenue, reporting $1.4 billion vs. the analysts’ call for $1.1 billion. This represents a 6.6% year-over-year jump. MKL is below its 50-day moving average (MA) and is a HOLD.

Cambria Global Value ETF (GVAL) dipped 1.09% last week, dropping back from its 52-week high just one week earlier. With Q4 traditionally strong for global stock markets, GVAL remains a BUY.

Google Inc. (GOOGL) fell 2.78% last week after reporting earnings and hitting a 52-week high. GOOGL reported an earnings “beat” with earnings per share (EPS) of $9.24 per share on revenue of $22.5 billion. The consensus earnings estimate had been $8.63 per share on revenue of $17.9 billion. Revenue jumped 20.2% on a year-over-year basis. Stopping just a few cents under its 50-day MA, GOOGL is now a HOLD.

The Walt Disney Company (DIS) remained flat last week, dipping just 0.39%. Disney’s earnings announcement is slated for Nov. 10, after markets close. Analysts’ are calling for EPS of $1.16 on revenue of $13.60 billion. DIS is a HOLD.

iShares MSCI Philippines (EPHE) lost 3.67% over the past five trading days. A technical look at this position suggests a case for a bottom. EPHE took two recent bounces upwards from its 200-day MA a little over one month ago. More recently, EPHE took another double bounce just above its $35 price level. This type of trading pattern suggests a future move higher. EPHE is a HOLD.

Illumina Inc. (ILMN) rose 0.96%. Illumina reported earnings after-hours last night of $0.97 EPS on revenue of $607.1 million. This handily beat the consensus estimates, which called for EPS of $0.87. Revenue also showed positive results, growing 10.3% on a year-over-year basis. ILMN issued forward earnings guidance of $3.27 to $3.32 per share. ILMN is a HOLD.

Phillips 66 (PSX) gave back 0.63% over the past week — a week that included its third-quarter earnings report. PSX reported EPS of $1.05 vs. an estimated $0.89 EPS. Revenue was $22.0 billion vs. the consensus estimate of $25.5 billion. In a bullish move, Phillips 66 also committed to buy back $1 billion to $2 billion in stock over the coming year. PSX is a BUY.

Sincerely,

Nicholas A. Vardy