Bad news is often good news for investors these days, who have to perform mental gymnastics as the economic picture comes into focus. Traditionally negative indicators of a weaker economy such as rising unemployment or falling consumer spending tend to result in lower inflation, which likely means the Fed can take its foot off the gas with monetary tightening, which should mean less pressure to raise interest rates, which means potentially higher stock valuations.
We saw some of great examples of this last week.
First, the August Job Openings and Labor Turnover Survey (JOLTS) came up surprisingly short. There were a seasonally adjusted 10.1 million job openings at the end of August, down from 11.2 million a month earlier. That's the biggest month-over-month decline in job openings since the depths of COVID in April 2020. Facing higher interest rates and signs of a slowing economy, employers appear to be cutting back on their hiring plans.
We also saw weak US manufacturing data (the lowest reading since May 2020) which offered new evidence that economic growth and demand are slowing which on the surface is not normally a plus for stock markets. But you can follow the breadcrumbs from this data to a Fed that is showing signs of success in bringing inflation back under control and therefore may be more inclined to ease off the pace of its aggressive interest-rate hikes in the months ahead.
Investors didn't panic at these clear signs that the economy may be heading for trouble, instead they celebrated. The market, which was overdue for a rebound rally anyhow, ripped higher for two full days on Monday and Tuesday.
Bets on the Fed Funds rate getting to an upper band of 5% by the end of 2023 fell away, according to the CME FedWatch Tool. By Tuesday, futures markets were pointing to the 4% to 4.25% range as being the the most likely target.
Screens were flooded with green by Tuesday’s close after these two rather economically disappointing data releases. Sentiment were also bolstered by the Reserve Bank of Australia (RBA), who surprised everyone when it raised the Australian version of the Fed Funds interest rate by a mere 0.25% when it had been widely expected to go with 0.50% or even 0.75%. Cue more hope that we may all be getting closer to peak interest rates for this hiking cycle.
Faced with this suddenly born-again idea that interest rates may not rise quite as fast or for as long as feared, the Fed got straight down to business pouring cold water on it, using its favorite weapon: dialed-up Fed-Speak. Chair Jerome Powell’s foot soldiers were blitzing the airwaves and roaring fire and brimstone from stages around the country, turning up the volume with the Fed’s highly-targeted messaging.
San Francisco Fed’s Mary Daly reiterated the Fed’s hawkish stance and the commitment to getting inflation down while strongly dismissing expectations of rate cuts in early to mid-2023. Atlanta Fed’s Raphael Bostic also dismissed the notion of rate cuts next year. Fed Governor Christopher Waller, a current voting member of the Federal Open Market Committee (FOMC) that sets the interest rates, was pretty explicit when he said that"inflation is far from the FOMC's goal and not likely to fall quickly" while his fellow Governor Lisa Cook described inflation as “stubbornly persistent”. Minneapolis Fed President Neel Kashkari said the Fed was “quite a ways away" from pausing its campaign of interest-rate increases.
This all burst the market’s bubble and on Wednesday and Thursday we saw far more muted enthusiasm ahead of Friday’s important jobs report as investors were reminded of the old adage that fighting the Fed is usually not a great idea. What we eventually saw on Friday was yet another classic example of the “good news is bad news” effect. More mental gymnastics required.
Pre-market, we learned that the US economy had added yet another 263k jobs in September, over 50k down from the August increase of 315k, but still a further expansion of job creation and greater than anticipated. More importantly, the unemployment rate rather unexpectedly fell from 3.7% to 3.5%, a half-century low. In normal times, all pretty positive news for the economy.
However, the market quickly decided to interpret this as a sign that the job market is still strong enough for the Fed to feel the need to continue its aggressive inflation-fighting efforts through interest rate hikes. Stock prices fell hard across the board as we experienced yet another brutal Friday (an increasingly common feature over the last couple of months).
It wasn’t enough, however, to wipe out Monday and Tuesday’s spectacular gains and the major indexes closed broadly higher for the week for the first time in what feels like ages, although well off their highs from Tuesday evening.
The script for how this market misery ends is no mystery: Inflation peaks and quickly recedes, the economy slows meaningfully but doesn’t collapse, geopolitics improves and the corporate earnings outlook stays relatively stable - all of which gets the Fed to peak hawkishness and a pivot away from hiking interest rates (maybe even towards cutting them again). That’s it. That’s the simple recipe to end this bear market and all market participants know it.
This coming week is extremely important for figuring out where we are with this narrative as we get the latest inflation numbers (both retail Consumer Price Index CPI and the wholesale Producer Price Index PPI) and the Q3 earnings season gets under way (see THIS WEEK’S UPCOMING CALENDAR below).
Longer term investors, however, should not deviate from the plan of continuing to systematically buy index funds or certain factor-based ETFs on a regular basis (weekly, bi-weekly, 2x per month, monthly - whatever), indeed stepping up the amount they buy right now, if cash flow allows. I have no idea exactly when, but one day relatively soon you will be very, very glad you did.
OTHER NEWS
K-Krypto trouble .. Finance guru Kim Kardashian will pay $1.25 million to settle regulatory charges that she failed to disclose the $250k she was paid to promote tokens of cryptocurrency Ethereum Max (EMAX) to investors on her Instagram account, the Securities and Exchange Commission - SEC (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) announced last week.
Her promotional post included a link to the EMAX website, which provided instructions for how to invest in EMAX, which fell 97% in value after her post first appeared. She agreed to give back the $250k and pay a $1 million penalty.
“This case is a reminder that, when celebrities or influencers endorse any investment opportunities, including crypto asset securities, it doesn’t mean those investment products are right for all investors,” SEC Chairman Gary Gensler said.
KK is the latest celebrity to face punishment for flouting investor-protection laws over getting mixed up with crypto bros and their promotional schemes. Boxing’s Floyd Mayweather, music industry’s Nick Carter (‘N Sync) and Soulja Boy and YouTuber Jake Paul all face similar or greater sanctions for allegedly fraudulent crypto involvement.
Please let it be over .. Like a bad smell, Elon Musk wafted back into our consciousness as he finally admitted defeat and agreed to buy Twitter (TWTR) by an October 28th deadline for the price to which he had originally committed, hopefully bringing this whole tiresome saga to an end.
Unsurprisingly, the news boosted the ailing TWTR stock price, but Tesla (TSLA) shareholders were not impressed that the company’s notoriously unfocused and erratic boss will now have a shiny new toy to play with and TSLA stock stumbled badly on the news. Out of the Jack Dorsey frying pan and into the Elon Musk fire. Gotta feel for those Twitter shareholders when it comes to who’s driving the train.
UNDER THE HOOD:
Regardless of the prevailing narrative, the main reason for the rally early last week was buyers’ recognition of an oversold condition and a ripe environment for BTFD activity with RSI readings below 30 as they were to start the week (see LAST WEEK BY THE NUMBERS below). We have to keep in mind that Demand readings are only a week or so away from being at multi-year lows.
While every final market bottom starts with a meaningful bounce, only a tiny fraction of meaningful bounces are at market bottoms. The rest are just misleading traps and we just lived through a doozy of an example of one this past July and August.
While not impossible of course, a new bull market that began on October 3rd is still not a high-probability outcome, the burden of proof remains with the bulls to change that opinion.
Core long-term technical trends have not yet definitively reversed course. Longer term investors are advised to simply continue to just put money into the market on a cadence based on the calendar, not based on some gut feeling or the conflict-ridden advice of some transaction-compensated talking heads on CNBC who won’t think twice about you possibly incinerating your portfolio by doing what it is their Wall Street employers want you to do.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Q3 earnings season kicks off this week with several big banks among those reporting. JPMorgan Chase, Wells Fargo, Morgan Stanley, Citigroup, Pepsico, United Health, Walgreens and Delta Airlines are the headliners.
The main event is a really big deal .. the Bureau of Labor Statistics will report the Consumer Price Index (CPI) retail inflation report for September on Thursday. Headline CPI to expected be up 8.1% year over year and the Core CPI (ex-food and energy) to have climbed 6.5%. The wholesale version, the Producer Price Index (PPI) for September, comes out on Wednesday.
Markets will also be watching the release of minutes from the Fed's September meeting, the latest Retail Sales report and the University of Michigan's Consumer Sentiment Survey.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 24% (up from 20% the previous week)
→Neutral: 21% (up from 19% the previous week)
↓Bearish: 55% (down from 61% the previous week)
Net Bull/Bear spread .. ↓Bearish by 31 (Bearish by 41 the previous week)
Source: American Association of Individual Investors (AAII).
Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
(For context: The highest recorded percentage of AAII bearish sentiment was 70% and occurred on March 5, 2009 near the end of the financial crisis bear market. The lowest percentage of AAII bears was 6% on August 21, 1987 not long before the stock market crash of October 1987).
Weekly sentiment survey participants are usually polled on Tuesdays or Wednesdays.
LAST WEEK BY THE NUMBERS:
Last week’s market color from finviz.com
- Last week’s best performing US sector: Energy (two biggest holdings: Exxon Mobil and Chevron) for the second week in a row - up 13.7%
- Last week’s worst performing US sector: Real Estate (two biggest holdings: American Tower and Prologis) - down 3.9%
- The S&P 500 out-performed the NASDAQ-100
- Emerging Markets slightly outperformed US Markets and International Developed Markets
- Both Mid and Small Cap stocks beat Large Cap stocks
- Value handsomely beat out Growth
- The proprietary Lowry's measure for US Market Buying Power is currently at 145 and rose by 7 points last week and that of US Market Selling Pressure is now at 174 and fell by 4 points over the course of the week.
- SPY, the S&P 500 ETF, remains below its 50-day and 90-day moving averages and well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 38**. SPY ended the week 24.0% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, remains below its 50-day and 90-day moving averages and well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 36**. QQQ ended the week 33.4% below its all-time high (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
- VIX, the commonly-accepted measure of anticipated upcoming stock market risk and volatility implied by S&P 500 index option trading (often referred to as the“fear index”) ended the week fractionally lower at 31.4. It remains above its 50-day and 90-day moving averages and well above its long term trend line.
ARTICLE OF THE WEEK:
This week .. this amazing piece by Josh Brown about what has happened in America in the last three years rightfully went viral last week in finance-world and well beyond.
EXPLAINER: FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity) .
SECURITIES AND EXCHANGE COMMISSION (SEC)
The U.S. Securities and Exchange Commission (SEC) is an independent federal government regulatory agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation. It was created by Congress in 1934 as the first federal regulator of the securities markets. The SEC promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States. It also approves registration statements for bookrunners among underwriting firms.
Generally, issues of securities offered in interstate commerce, through the mail or on the Internet, must be registered with the SEC before they can be sold to investors. Financial services firms—such as broker-dealers, advisory firms and asset managers, as well as their professional representatives—must also register with the SEC to conduct business. An example: they would be responsible for approving any formal bitcoin exchange.
The SEC's primary function is to oversee organizations and individuals in the securities markets, including securities exchanges, brokerage firms, dealers, investment advisors, and investment funds. Through established securities rules and regulations, the SEC promotes disclosure and sharing of market-related information, fair dealing, and protection against fraud. It provides investors with access to registration statements, periodic financial reports, and other securities forms through its electronic data-gathering, analysis, and retrieval database, known as EDGAR.
The SEC is headed by five commissioners who are appointed by the president, one of whom is designated as chair. Each commissioner's term lasts five years, but they may serve for an additional 18 months until a replacement is found. The current SEC chair is Gary Gensler, who took office on April 17, 2021. To promote nonpartisanship, the law requires that no more than three of the five commissioners come from the same political party.
The SEC consists of five divisions and 23 offices. Their goals are to interpret and take enforcement actions on securities laws, issue new rules, provide oversight of securities institutions, and coordinate regulation among different levels of government.
The SEC is allowed to bring only civil actions, either in federal court or before an administrative judge. Criminal cases fall under the jurisdiction of law enforcement agencies within the Department of Justice; however, the SEC often works closely with such agencies to provide evidence and assist with court proceedings.
Among all the SEC's offices, the Office of the Whistleblower stands out as one of the most potent means of securities law enforcement. Created as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC's whistleblower program rewards eligible individuals for sharing original information that leads to successful law enforcement actions with monetary sanctions in excess of $1 million. The individuals can receive 10% to 30% of the total sanctions' proceeds.
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