Are markets poised for higher levels?
Abraham George Macro Musings
What a week of contrasts! The S&P 500 closed 8% lower for the month of September but closed 8% higher for the month of October. What caused this big swing?
All the financial education that is out there is for you to take rational decisions. Be it fundamental or technical but when markets reach a saturation point or an extreme all that matters is sentiment. Last week was a classic example of that. The fundamental analysis didn’t matter nor did earnings.
The Fed is known for its firefighting. In real life, someone else sets up the fire and the firefighters come to put it off.
However, in the Fed’s case, they knowingly set up the fire and then try to put it off. What am I saying here? The Fed spent much of last year denying the obvious inflationary pandemic response from policymakers and the subsequent evidence of that inflation.
I think there was a lot of politics behind that too. The inflation denial by the Fed helped the Democrat-controlled Congress with the necessary ammunition to push through additional fiscal spending. Fed Chairman Jerome Powell started becoming vocal about inflation only after his reappointment was confirmed by president Biden.
This sudden switch in the narrative of inflation being no more transitional and the speed of raising rates that were never seen in the last 60 years has created all sorts of confusion and volatility in the markets.
It was most felt in the growth stocks and still continues to be for a good reason. It was Warren Buffett who explained last year that at zero interest rates into perpetuity, the valuation of the stock market is essentially infinite. There are really not many alternatives. Those that are required to earn a return, especially the likes of pension funds are forced to take much more risk.
Therefore the FAANG stocks plus Microsoft which represented nearly a quarter of the valuation of the S&P 500 went for a toss. Even the extreme weakness within the FAANG was very varied. Meta ( Facebook) and Netflix had weaknesses of their own making and can still continue to face them even longer for how long we don’t know. Meta is now a much different story and I will soon cover that through a special report.
Think current levels of Apple, Google, Amazon plus Microsoft are interesting levels to consider some long-term buying. The rising interest rate environment especially zero levels was most damaging for growth stocks and any change or slowdown in the Fed monetary policy should be supportive of the growth stocks now.
The earnings report in general for corporate America so far was not that bad. No doubt the bad earnings from the tech giants got a lot of media attention. We have now heard from over half of the companies in the benchmark S&P index and there are more to come in the coming weeks. 70% of the companies so far have beaten earnings and are growing earnings by more than 2.2% compared to Q3 of last year.
Considering the global issues and the steps the other major central banks like BOE and BoJ have taken the Fed should be dialing down on their interest rate rhetoric. However, it won’t surprise me if the Fed raises rates by another 75 basis points on Nov 3 though my best scenario is for a 50 basis point hike which will give a tremendous boost to the equity markets.
The weekly closing on Friday is a very good technical close. So far the Democrat-controlled Congress was able to execute the Democrat-led agenda but think on Nov 8th, we should get at least a divided Congress. This will bring gridlock, which should bring stability and better certainty to the fiscal outlook. That has been historically good for stocks.
As I stated at the outset the goal is to be rational but as human beings, we will never be rational. Therefore the goal should not be to be rational. Instead, it should be to profit from the irrationality of others. Generally, people are smart but as a group, we sometimes act stupid. And this creates lots of opportunities.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.