October 30, 2023

“Focus on Value because most investors focus on outlooks and trends.”

Sir John Templeton

As we come to the close of what has become “Red October,” despite some good numbers from Meta (Facebook) shares, which had advanced more than 4% shortly after the company released its results, reversed course and were off more than 2% following the earnings call. That didn’t seem like enough spooking the market after dumbing down expectations. Shares of Alphabet (Google) were hit hard, down 9.5% after the company’s earnings report indicated disappointing performance from its cloud segment. Further, a sour outlook from Texas Instruments, a broad-based maker of chips, didn’t help matters. That and the Israeli war put a damper on a very busy news week.  Here are the numbers:

The S&P 500 was down 2.21% entering the statistical correction range of 10% since the high, the Dow Jones Industrial Average was off 1.74% and the Nasdaq joined the correction party down 2.6%. Overseas, the FTSE 100 lost 1.50% and the broad international MSCI-EAFE was down fractionally at .48%. Two-year Treasuries closed Friday with a yield still hovering on above 5% at 5.15% and the 10-year, after scaring the traders rising above 5% briefly, closed at 4.841%.

So, the Republicans nominated and quickly elected Mike Johnson from Louisiana as the Speaker on their 4th attempt. This should spell good news for fiscal policy as his record is that of a principled conservative. Johnson, 51, has been serving as vice chair of the House Republican Conference. First elected to Congress in 2016, he also was chair during 2019 and 2020 of the Republican Study Committee, an influential group of conservative House GOP lawmakers. How effective will he be? The November 17 deadline for funding key government spending is looming and so far, he quickly got 4 of the 12 measures passed, all be it the ones no one was particularly fighting about. His claim to fame is that almost everyone in Congress likes him despite policy disputes, He is smart, polite, communicates very well, and it seems he has the best chance of working within his caucus and at least being heard by the other side.

The market essentially ignored the news and focused on the Israeli war and the treasury markets which have been stubbornly bearish.

The good: “U.S. economic growth galloped at a 4.9% annual pace in the third quarter — fueled by a big burst of consumer spending — and defied expectations of a slowdown. Never bet against the U.S. consumer.

The sharp increase in GDP was more than double the rate of growth in the first six months of the year. It was also the largest gain since 2014 excluding the pandemic years of 2020-2021.

Wall Street analysts had forecast a 4.7% increase in gross domestic product, the official scorecard for the economy. “(Market Watch) Everyone was expecting a lower number due to higher interest rates slowing consumer spending and hitting corporate profits by higher borrowing costs, but as such, it has not materialized. However, we do expect this effect to settle in soon. The odds-on favorite now is that the Federal Reserve will stand pat on interest rate increases this week.

Consumer spending rose a sharp 0.7% in September, underscoring the recent strength in the U.S. economy. Analysts polled by the Wall Street Journal had forecast a 0.5% gain.

Consumer spending is the main engine of the U.S. economy. Outlays grew a robust 4% in the third quarter, marking the biggest increase since 2019, excluding the pandemic years. Americans spent more last month on services such as travel, healthcare, and housing. Some of the increase reflected the rising cost of necessities, however. Consumers also bought more cars and spent more on prescription drugs and gasoline. Consumer sentiment improved slightly at the end of October, but higher gas prices left people more worried about inflation.

The final reading of the sentiment survey edged up to 63.8 from 63.0 earlier in the month, the University of Michigan said Friday. The index had touched a nearly two-year high in July before retreating. A sharp decline recently in the stock market has added to consumer angst.

The consumer-sentiment survey reveals how consumers feel about their own finances as well as the broader economy. A gauge that measures what consumers think about the current state of the economy rose to 70.6 from 66.7 in early October. Yet a measurement of expectations for the next six months slipped to 59.3 from a preliminary 60.7. The economy is still growing strongly despite stubbornly high inflation and rising interest rates. Growth in the third quarter was the strongest in almost 10 years, excluding the pandemic years of 2020-2021. The chief reason? A strong labor market and the lowest unemployment rate in decades. Americans feel confident enough to keep spending because they feel secure in their jobs. The soft consumer-sentiment reading reflects “ongoing concerns about inflation and, to a lesser degree, uncertainty over the implications of negative news both domestically and abroad,” said Joanne Hsu, director of the survey. Initial jobless claims rose by 10,000 to 210,000 in the week ended Oct. 21, the Labor Department said Thursday.

Economists polled by The Wall Street Journal had estimated new claims would rise 9,000 to 207,000.  Last week claims fell a revised 11,000 to 200,000. That compared with the initial estimate of a drop of 13,000 to 198,000. After drifting higher this year, claims have fallen back to a range not seen since January. The number of people already collecting jobless benefits in the week ended Oct. 14 rose by 63,000 to 1.79 million. That’s the fifth straight increase and the highest level since May. It could be a sign that workers are having trouble finding new work quickly. As Market Watch reports, the low jobless claims suggest that employment conditions remain very strong and economic growth might not slow in the fourth quarter as many economists expect. As such, the Fed might need to raise rates a bit further. Low claims mean few layoffs. The rise in continued claims could mean that hiring is slowing down.

 “The continuing claims numbers bear watching for signals about a softening in labor demand, if a growing number of workers stay on government support going forward, unable to find other jobs quickly,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

The bad: As mentioned above, the S&P 500 closed in correction territory Friday to close out a dreadful week for stocks. The S&P 500 fell 0.5%, putting the large-cap index 10% below a recent high of 4,588.96. It’s the S&P’s 103rd correction on record. The last one came on Sept. 16, 2022.

The Nasdaq Composite, which entered its own correction on Wednesday, gained 0.4% on the day. It still fell 2.6% on the week. Both the S&P 500 and Nasdaq are on track for their worst October since 2018.

The Dow Jones Industrial Average hit its lowest closing value since March 28, dropping 367 points, or 1.1%. It was a busy week of earnings, and things won’t cool down next week. Aside from a sea of big names reporting results, including Apple, traders will be paying close attention to the Federal Open Market Committee’s November meeting. Around 150 S&P 500 companies are scheduled to report earnings next week.

The highlight of the week comes on Wednesday, however, when the Federal Open Market Committee concludes a two-day meeting. An interest-rate decision is due at 2 p.m. ET and Fed chairman Jerome Powell holds a press conference half an hour later. Economists and investors will also be closely watching next week’s labor-market numbers. On Wednesday, the Bureau of Labor Statistics will release the Job Openings and Labor Turnover Survey for September. Then on Friday, the BLS will release the jobs report for October. Economists are forecasting no change in the unemployment rate, currently at 3.8%.

The Ugly…. U.S. mortgage rates rose for the seventh week in a row, making it the longest streak of increases since last spring. The 30-year fixed-rate mortgage averaged 7.79% as of October 26, according to data released by Freddie Mac FMCC, +1.97% on Thursday. Rates continue to be at the highest level since November 2000. A year ago, the 30-year was averaging at 7.08%.

The average rate on the 15-year mortgage was 7.03%, up from 6.92% last week. The 15-year was at 6.36% a year ago. U.S. pending home sales rebounded in September but remain near a record low as high mortgage rates and low inventory continue to hurt the real-estate sector.

Pending home sales rose 1.1% in September from the previous month, according to the monthly index released Thursday by the National Association of Realtors. No surprise that pending home sales were still depressed on an annual basis due to the dearth of home listings. The September figure was the second-lowest reading since the NAR began tracking the data in 2001. Transactions were down 11% from last year

Why am I looking for a Santa Claus rally the next two months? The US House gets back to work, the Fed pauses, the market is oversold, and in the past 15 corrections for the S&P 500, it took an average of three months for its performance to recover, while the index gained an average of 10.1% a year later. Since 1928, the S&P 500 rose an average of 9.1% a year following a correction.

We shall soon see if I am right, in any case we will remain defensive in our allocation.

Mike