A Bit of Everything
Within the investment world, quiet and boring is actually a desirable environment. However, the third quarter was anything but that. Instead, it was full of impactful events and developments:
Political intrigue? Check! Presidential candidate debate filled with scandalous accusations from both parties, and a second assassination attempt against a presidential candidate.
Nuclear war threat? Check! Russia threatened nuclear attacks on NATO countries if Ukraine used NATO supplied long-range missiles to strike targets in Russia.
Escalating war in the Middle East? Check! Israel destroyed Hezbollah targets in Lebanon.
FED policy pivot? Check! FOMC eased monetary policy with a 0.5% reduction of federal funds rate
Chinese economic policy pivot? Check! China initiated a multi-level plan to stimulate their economy and strengthen their banks.
Catastrophic natural disaster? Check! Hurricane Helene ravaged multiple southern states in the U.S. and caused more than 130 fatalities.
These are just a few of the major headlines, but as you can see, the last couple of months really offered a bit of everything. If we had to describe the markets’ reaction in Q3, it would be “utterly confused!”
After a brief 6% correction in early August, stock markets steadily moved up to new highs. It seems as though investors are convinced the FED rate cuts will keep the U.S. economy from falling into a recession— The miracle of a “soft landing,” with inflation dropping to the 2% FED target while unemployment does not rise much higher.
The bond markets on the other hand, indicate this may not be the case. Investors sold bonds, which pushed yields higher, indicating possibly higher inflation down the road…
Gold prices also reached all-time highs at $2,750 per oz, indicating investors are afraid that some type of economic or geo-political crisis is brewing, thus, they are looking for safety.
Despite the recent Chinese stimulative policies, oil markets declined to the $68 per barrel level, indicating lack of demand from possibly weak global economic activity. Natural gas prices, however, moved higher as utility companies in the U.S. and Europe try to secure heating supplies for the coming winter.
So, what are we to make of these counter-intuitive market movements? Is the stock market right and investors should go all in? Or, are the bond, gold, and oil markets right and there’s weak economic activity and trouble brewing around the world?
Here at Fierce, we remain cautious when markets send contradictory signals. For one, “soft landings” are kind of like mythological creatures. We hear about them, but we never see them. In reality, inflation comes down when people spend less. People spend less because their income doesn’t grow as fast as prices, or they fear they may lose their job. Fear, like greed, is a very powerful emotion. When fear curtails spending, it causes unemployment for others, and thus the increase in unemployment becomes a self-fulfilling prophecy.
Recently, there have been significant layoff announcements by big companies: Intel: 19,000, Dell: 12,500, Cisco: 9,600, Stellantis: 2,850, PWC: 1,850, GM: 1,600, Microsoft: 650. There have also been thousands of “soft layoffs” from companies like Amazon and IBM by eliminating the work from home option, which results in thousands of resignations (under the radar layoffs). These job losses will show up in the unemployment data with a delay, once all severance benefits are exhausted and these former employees are eligible to file for unemployment benefits.
Perhaps layoffs like these are the reason the FED and the People’s Bank of China decided to pivot towards stimulative monetary policies. While investors may perceive these policies as favorable to the stock market, they also need to consider that central banks do not take drastic measures unless their respective economies are in trouble. Furthermore, there is concern of how much help central banks can provide in a future economic slowdown without rekindling inflationary pressures.
Speaking of inflation, it is surprising to us that there has not been much media coverage about the upcoming longshoremen strike of all southern and eastern U.S. ports. Shutting down the ports from Texas to Maine would surely disrupt supply chains, create shortages, raise prices, and potentially reverse the progress made towards bringing inflation under control. To the extent deliveries were delayed for weeks, holiday sales would be impacted, which would reduce fourth quarter GDP…
On the bright side, the U.S. government did not approve the Ukrainian request for the use of NATO long-range missiles against targets deep in Russian territory. This was a red line by President Putin and crossing it could have led to nuclear strikes against NATO countries. Therefore, taking the nuclear threat off the table is priceless!
More on the topic of war, the Iranian government seems resigned up to this moment watching the eradication of its sponsored organizations Hamas and Hezbollah by Israel, without retaliating. A little weird? Yes. A little suspicious? Maybe. Yet, oil trading between $50 and $70 per barrel is much better for Western economies as opposed to oil trading between $100 and $200 per barrel if war in the Middle East was to further escalate.
Lastly, the U.S. election period will be over in about five weeks. Assuming a clear result, we can get back to assessing (with greater certainty) new opportunities and favored sectors that will emerge. Until then, with polls coming in every few days, and investors trying to front run the election result, we can expect to see more market volatility in the near term. But stay calm, October is typically a volatile month anyway, even without elections. The short term noise will be over soon, and we expect the markets to do well in the post-election environment, as they usually do.
We hope our insights help add some clarity to the complexity of financial markets, and we’re always available to answer your questions.
Stay Fierce!
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