What to worry about today and in the days ahead

Stocks shrugged off a DOJ threat to kneecap one of the world's greatest technology companies climbing to new heights. Traders are on the search for the next big thing to drive markets higher yet as bets pile on ahead of Q3 earnings while companies slow walk from the paddock to the starting gate.

Stay away from the punch bowl. You could walk onto the floor of New York’s iconic stock exchange 1000 times and still be in awe of that temple of capitalism. You could feel the chill of early autumn in the shadows yesterday. As I walked from our offices perched on the edge of the Hudson River past the 9/11 Memorial, through Zuccotti Park, and made a right in front of Trinity Church, I could smell the beautiful blend of world cuisines coming from the booths and carts set up all about. Dinner was still HOURS away, but I had to focus, so I did my best to stay on task. I was doing all right until one of those smells pierced through all others. It was chestnuts. Yes, roasting chestnuts! That smell goes hand in hand with the holiday season in New York. Then the fear overtook me. No, I was not getting nervous about being on live TV in mere minutes. No. I suddenly realized that we were at the starting gate to the race toward the holidays, which seems to be getting earlier and earlier each year. For Wall Street, that means that some traders start to… well, lose motivation. I am not judging, but it is a fact. My worry was that at this very moment, we are at a major inflection point for the economy, the market… and the free world. This is not exactly a convenient time to push aside the portfolio and start thinking about which crazy uncle to uninvite to your holiday soiree, or whether to go with gin or vodka for your signature holiday cocktail (go with Champagne – everyone loves it).

We just got over a massive spike in inflation! The Fed raised interest rates at a pace not seen since the 1980s. Before that there was a pandemic, leaving us all searching desperately for toilet paper and… well, basic life needs. People died; lots of them. But the stock market managed to weather all that. Indeed, the S&P500 rose by some +92% from March of 2020 through yesterday. Not without some pain in 2020 and 2022. But stocks powered through it all. And the economy! But for a brief falter at the start of the pandemic, the US economy just grew and grew. The Fed tried hard to break it and allow inflation to ease, and despite its best efforts the economy managed to stay on its feet. Inflation is almost back to where it was prior to the pandemic and the Fed has abandoned its belligerent ways. For a minute, the economy, specifically the labor market seemed to show some signs of exhaustion, worrying the Fed and the rest of us. The Fed answered with a bigger than expected rate cut and the rest of us started to worry that the party would have to finally end. But wait. The labor market may not be as bad as we all thought. Would that cause the Fed to stop its rate cutting? Will inflation pick back up… as it did in the 1980s? Wait, did the S&P just make a new all-time high? Oh, and there is an election with both candidates promising everything to everyone giving us all the feeling that we may end up with nothing but a big unpaid bill. In other words, who knows what the next president will do for our portfolios? And finally, there is the looming threat of all-out war in the middle east, threatening to cause crude oil prices to rise… AND CAUSE INFLATION AGAIN.

Did I just get your heart racing? To be clear, the market is not exactly flashing signs of complacency with the VIX Volatility Index above 20, still elevated. That implies that the market can go up OR DOWN by 1.3% a day. This morning, we will get a read of inflation with the Consumer Price Index / CPI release. Economists are expecting the topline number to come in at +2.3% down from +2.5%. That is getting really close to the Fed’s +2%, so it is safe to assume that the Fed is not concerned with inflation and is not likely to be considering raising rates based on that. So, the concern should be economic health, because no matter where rates are, all ships go down with a falling economy. On Friday, we will get the preliminary release of University of Michigan Sentiment which is a really good advance indicator of economic health. It measures consumer sentiment. Remember my mantra, “confident consumers consume, and consumption drives economic growth." Next week, we will get some more color on consumption when we get Retail Sales figures. We will also get some data on output from American industry with Industrial Production. US manufacturing has been gasping for air lately, based on PMI figures. I know it doesn't sound sexy, but NBER (National Bureau of Economic Research) looks at Industrial Production in determining whether or not the US is in a recession, so, you should too 😉.

Finally, earnings season officially starts tomorrow and will ramp up next week. I like to joke that at the start of every earnings season, we always say things like “pivotal” and “critical,” as in this is the one that is going to determine where the market is going from here. OBVIOUSLY, silly, earnings are ALWAYS IMPORTANT! We will start with financials and quickly transition to technology. Financials, always set the mood for the whole season. Financials have had strong performance year to date, and many are expecting some more green shoots for the sector now that the Fed is lowering rates. Expectations are high. Do I have to say that expectations are high for technology earnings as well? I use “technology” loosely, because tech is spread out over Information Technology and Communications Services, and some Magnificent 7 stocks can be found in other sectors altogether. In any case, a lot of emotion is tied up in financials and techs, so get ready for the storm in the days ahead.

I made my way to the white tent at the left-hand side of the NYSE and walked past the front façade, and there it was, the entrance to the exchange. It is an unassuming entry for such a revered establishment. I entered, picked up my badge, walked up the worn marble steps, took a deep breath, and stepped onto the trading floor. The wood planks beneath my feet were the same ones that were covered in tickertape in years past. Those same floorboards witnessed celebrations for the Dow reaching 100, 1,000, and 10,000 (1906, 1972, and 1999). The Dow is now at 42,500, and the trading floor has evolved quite a bit in the last decade, but I looked around and there was still the hustle, bustle, hoots, and whatnot which reminded me that although the time to the holidays can be measured in weeks, Wall Street is very much paying attention to what is going on outside the hallowed halls of the exchange. I left the exchange with the same awe as I had so many times in the past. I then applied myself to finding those roasted chestnuts. I couldn’t find them. I was relieved.

YESTERDAY’S MARKETS

NEXT UP

• Consumer Price Index / CPI (Sept) may come in at +2.3% after printing +2.5% for August.
• Initial Jobless Claims (October 15^th) is expected to come in at 230k, a slight increase over last week’s 225. REMEMBER, the wind has changed, and now we want to see a lower, NOT HIGHER number to ease our fears of a collapsing labor market.
• Fed speakers today: Cook, Goolsbee, Barkin, and Williams.
• You still have 76 days until Christmas, calm down 😉.

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