September 25th, 2023

“The function of economic forecasting is to make astrology look respectable.”

John Kenneth Galbraith

That has certainly been the case lately, as we come to the close of the 3rd quarter, we have seen a spectacular July, anemic August and a schizophrenic September. Here are the numbers from last week: the S&P 500 ended the week down 2.81%, the Dow Jones Industrial Average was off 1.87%, the Nasdaq lost 3.34%, the internationals held up better, with the FTSE 100 off a fractional .36%, and the MSCI-EAFA dropped .20%. 2-year treasury yield ended Friday at 5.12% and the 10-year yielded 4.43%.

With the House of Representatives ending a tumultuous week of negotiations trying to avert a government shutdown, (fear not, it has happened many times before and the markets reacted with a big yawn) as the conservative republicans and are trying to hold Speaker McCarthy’s feet to the fire and try to curb all this reckless spending. It is more important to the politicians than the constituents, so they can blame each other. The media was more fixated on the Senate dress code than on more important matters. You must wonder if foreign leaders can ever stop laughing. Regardless, the big non-news was the Federal Reserve holding rates in a move everyone expected. But again, signaled that increases in the future were possible or probable depending on whom you believe.

The United Auto workers are implementing their “rolling strike” strategy to find a balance to get what they want without bankrupting their membership and convincing them that the democratic party new green initiative for all to drive electric cars won’t put them all out of a job. Still, the unemployment numbers and inflation numbers were adding to the concerns. The United Auto Workers on Friday expanded its strike to 38 General Motors Co. and Stellantis NV auto-parts distribution centers in 20 states, hobbling the two carmakers’ repair networks.

As stated above, U.S. stocks capped off a rocky week by finishing lower on Friday after erasing their gains from earlier in the session as the Federal Reserve’s warning that it plans to keep interest rates higher for longer continued to reverberate across global markets. The S&P 500 and Nasdaq have now fallen during six of the last eight weeks.

Markets have been given several wake-up calls this week, the most notable coming from the Federal Reserve.

As Barron’s Callam Keown opines “But the latest unemployment data just delivered one that may be just as significant.”

The surprise decline in weekly jobless claims to 201,000, the lowest since January, suggests the labor market is still hot. (UAW strike timing, perhaps) After the Fed’s economic projections Wednesday showed interest rates staying higher for longer, the labor data further solidified that concept for investors. The market has been obsessed with when rate cuts will begin and how plentiful they will be in 2024. But that’s been abruptly replaced by the realization that policy will remain restrictive for some time.

The market reaction has been significant since the Fed’s projections showed rates staying above 5% through 2024. The S&P 500 has fallen 2.6% over the past two sessions, and two-year Treasury yields have climbed to 17-year highs.

It also appears more justified in light of Thursday’s jobless claims data. A softening labor market is of paramount importance to the Fed to help its inflation battle.

Fed Chairman Jerome Powell said Wednesday a soft landing was not his baseline expectation, although it is what the central bank’s economic projections show.

It’s unclear why Powell was reluctant to say he expects a soft landing, which entails easing inflation without a recession or sharp rise in unemployment. His issue may be that you can’t have a soft landing if the labor market is running hot. So, what does that leave, no landing?

When it comes to markets, investors have reset their expectations in recent days. It leaves room for softer-than-expected economic data to rejuvenate the stock market.”

Does that mean the fourth quarter is looking positive and has a good ending for 2023? Always remember the market is always forward looking. And if the continued damage done by Bidenomics is somewhat thwarted by Congress, we may get something other than coal in our Christmas stocking.

Campbell Harvey, a Duke University finance professor, best known for developing the yield-curve recession indicator, (the indicator I frequently mention) says the Federal Reserve’s reading on inflation is out of whack. And, as a result, the likelihood that the U.S. slips into a recession is increasing.

The big question now is the severity of the economic downturn to come, if the central bank continues to raise interest rates. “The [inflation gauge] that the Fed uses makes no sense whatsoever, and it’s totally disconnected from market conditions,” Harvey told MarketWatch in a phone interview. The Fed’s measures of inflation are heavily weighted toward shelter costs, which reflect the rising price of rental and owner-occupied housing. For example, shelter inflation has been running at 7.3% over the past 12 months, (another hit to the budget of low- and middle-class Americans, who do most of the renting) and as of the most recent consumer-price index, for August. Shelter represents around 40% of the core CPI reading.

Furthering my Debby downer outlook, the leading economic indicators continue to decline for another month. Which explains the volatility in the markets.

In case you haven’t noticed. Oil rose to over $90 a barrel last week.  Why? Russia surprised oil traders this week by saying it will temporarily restrict exports of diesel and gasoline, exacerbating a global shortage of those fuels. Even though Russia hasn’t been selling oil products to most Western countries for the past year due to sanctions, it still sells them in Asia and elsewhere. Because oil is a global market, those sales to other countries add to the overall global supply and help put a damper on prices. Russia’s decision to suspend exports thus decreases supply and is likely to boost prices somewhat.

The good news, we continue to collect high short-term interest without much risk, dividend yields are attractive, and the market seems to be slowly getting back to fundamentals.

Mike