“There is only one side to the stock market; and it is not the bull side or the bear side, but the right side.” – Jesse Livermore
The current investment landscape has remained relatively unchanged, with notable challenges persisting since last year. As predicted, the trajectory of the stock market is closely tied to the duration of these obstacles.
Corporate America continues to navigate challenges such as inflationary pressures and an anti-business regulatory environment that affects various industries, from Financials to Energy.
The Housing market faces affordability challenges due to a combination of high prices and low inventory. With the Federal Reserve still in the picture, mortgage rates are unlikely to decrease. Additionally, the supply of homes remains tight as baby boomers, who own a significant portion of the housing market, prefer to stay put. Housing starts and builder confidence levels continue to decline due to poor market fundamentals.
Consumer sentiment remains bleak, with near-historic lows reported. A recent survey found that 88% of Americans believe the country is on the wrong track. The IBD/TIPP optimism index also reflects consumers’ negative outlook on the economy.
Furthermore, inflationary pressures are expected to persist, particularly in energy costs. Higher energy prices have already materialized and are likely to remain high. This reinforces the “Higher for longer” interest rate scenario, which is expected to last until 2024. Calls for rate cuts have been postponed to next year, and it is increasingly unlikely that any cuts will occur in the near future, unless the economy significantly deteriorates.
The Federal Reserve is facing a dilemma as it tries to balance the consensus estimates of a robust economy with the global manufacturing recession. Conflicting signals are prevalent throughout the market.
Both forecasters and investors are already anticipating a slowdown in the fourth quarter. However, the balance of risks has shifted towards a more negative outlook. Several short-term challenges, including the resumption of student loan repayments, ongoing UAW strikes, and a potential government shutdown, are likely to detract from growth in the coming months. The rapid increase in interest rates will further impact corporate activity, consumer spending, and housing market activity.
As a result, quarterly US GDP growth is expected to slow down from a 3+% annualized rate to below-trend levels of around 1%. These negative impacts are particularly focused on the US, as global factors also contribute to the uncertain outlook.
The Week on Wall Street
October began similarly to September, with stocks struggling as interest rates continued to rise. The 10-year Treasury yield is approaching its highest level in the current cycle, which has put further pressure on stock performance.
While there was a brief turnaround on Wednesday, the equity market is still trying to digest the significant increase in interest rates that occurred over the past two months.
Despite the recent difficulties, there was a late-week rally that helped break the S&P 500’s four-week losing streak and extended the NASDAQ’s winning streak to two weeks.
A government shutdown was temporarily avoided as Congress passed a continuing resolution to extend government funding through November 17. However, navigating the funding process in a highly politically charged environment and avoiding a mid-November shutdown is proving to be challenging.
In a surprising development, a motion to vacate the speakership was passed against Kevin McCarthy, making him the first House Speaker to be successfully removed in over 100 years. The House will now focus on electing a new speaker, which may prove difficult due to the current political climate.
In September, the US Manufacturing Purchasing Managers’ Index (PMI) showed slight improvement compared to the previous month. However, it still indicates a long-term deterioration in the manufacturing sector. The Services PMI Business Activity Index, on the other hand, experienced a stagnation in business activity after several months of growth, with high inflation, interest rates, and economic uncertainty impacting customer demand.
The ISM Services index slipped in September but remains in expansion territory. It is the weakest reading since May, but the index has been in positive territory since January.
The IBD/TIPP optimism indexes reflected sharp declines in October across all major components, marking a historically low level since the inception of the index. Consumer sentiment remains negative, particularly regarding the economic outlook, and all components have been in negative territory for six consecutive months.
Consumer confidence measures continue to remain significantly below pre-pandemic levels. This highlights the need for a substantial change in the economic environment to improve consumer sentiment and confidence.
Labor and Job Market
Job openings in the US bounced back in August after a decline in July, indicating that labor demand is holding up. The September payrolls report showed better-than-expected job growth but a stagnant unemployment rate. These numbers were accompanied by mixed data from the BLS Household Survey, which resulted in uncertainty and questions regarding the strength of job creation in the economy.
A Macro Issue
The ongoing financial aid provided to support Ukraine has raised concerns about its impact on the US economy. The sizeable amount of aid, which has surpassed $75 billion, contributes to the growing debt burden. This spending cannot continue indefinitely, especially when the household (or country) is already burdened with debt. It is imperative to address and resolve such financial concerns to prevent long-term negative consequences.
This issue of prolonged spending is one among many that contribute to the accumulation of debt and its potential consequences. The current situation is worsened by the normalization of interest rates, which are expected to remain high for an extended period. This shift indicates the beginning of a long-term trend, and reducing debt becomes the only viable solution.
The Global Scene
The UK’s manufacturing sector continues to face challenges, with the latest PMI signaling a sustained deterioration in sector performance. The services sector also experienced a decline, indicating a stagnation in business activity.
The Eurozone’s manufacturing sector has recorded consistent sub-50 PMI readings for 15 consecutive months, signaling a sustained decline. The composite PMI output index also remained below 50, indicating a moderate contraction in business activity across the Eurozone’s private sector.
The Canadian manufacturing sector experienced a deterioration in operating conditions for the fifth consecutive month. The PMI reading reached its lowest level since May 2020.
China’s manufacturing sector showed a marginal improvement. However, the services sector experienced a slowdown in activity, with only minimal expansion. These mixed results reflect the ongoing challenges faced by the Chinese economy.
Japan’s manufacturing sector experienced the steepest deterioration since February. The services sector, however, continued to expand solidly. The data indicates somewhat muted conditions in the manufacturing sector.
The bond market has experienced a relentless increase in the 10-year Treasury yield. This sharp rise in interest rates has presented challenges for fixed income investors.
Despite calls for an opportunity in bonds, the sector has underperformed equities by approximately 15% this year. The trend of rising rates has prompted caution, making bonds a less attractive investment option until price stabilization and an upward trend are observed.
The third quarter has proven challenging for investors, with every index posting losses. Energy-related sectors have outperformed, while financials, healthcare, biotech, and utilities have struggled to gain positive momentum this year.
Bonds have underperformed compared to equities, further emphasizing the changing investment landscape. The current market conditions require a significant shift to make stocks as attractive as they once were. Additionally, individual investors should consider their unique investment goals and circumstances.
The stock market is grappling with the impact of rising interest rates, leading to increased volatility. While the S&P 500 hovers above support levels, it is important to note that the market has experienced five consecutive weeks of losses.
Investors are now presented with a difficult choice as they consider putting money to work during a potential rebound rally. The current transitional market phase requires careful consideration of investment decisions.
Ultimately, the ongoing challenges in the market, compounded by rising interest rates, suggest the need for cautious investment strategies. The path forward remains uncertain, and investors should carefully evaluate their options in this evolving economic environment.