ANGLES.

The final full trading week of 2023 was basically more of the same. With many market participants already in holiday mode, volumes were low but even a rare victory for the bears on Wednesday was swiftly reversed by the bulls. Wall Street seems determined to keep this party going as long as it can.

Last weekend, Fed officials began trying to pour whatever the opposite is of gasoline onto the fire of stock market euphoria. And as the week began, the Fed presidents of Atlanta, San Francisco and Chicago all joined their New York-based colleague in pushing back on the jubilant narrative, emphasizing that it’s a reach to consider interest rate cuts until officials become completely convinced that the economy is firmly on a path back to the 2.0% inflation target. It’s currently close to double that.

But this kind of pushback is just about as meaningful as a Christmas card from your local internet provider if investors keep covering their ears and shouting “We can’t hear you!” and that’s exactly what the stock market did on Monday as indexes like the S&P 500 and especially the NASDAQ-100 continued their relentless climb.

Tuesday was another sea of green across trading screens with Small Cap stocks again stealing the show. All Fed pushback to market giddiness was once again routinely ignored. The stock market seemed absolutely determined to let the good times keep rolling and no chirping Fed presidents saying that perhaps traders may be getting ahead of themselves with interest rate cut expectations were going to stop that from happening.

However, after the closing bell, there was a bit of a gut-punch. FedEx delivered its Q3 results and missed earnings estimates by a mile. It also gave a gloomy forward guidance outlook. This is important as Fedex is sometimes considered to be something of a proxy for business activity in the U.S. economy.

Fedex shares sank as a result on Wednesday. After initially pushing index prices higher yet again, Wall Street finally decided around lunchtime that it was time to take a breather and bank some profits from the recent furious rally. Stocks actually ended up suffering their worst one-day drop in months with all the indexes sinking about 1.5% or more for the session.

In many ways, Thursday started out not dissimilar to Wednesday. A strong morning with prices driving higher on the back of some nice earnings reports was followed by a lunchtime pullback, but this time FOMO-infected buyers and the newly-emboldened BTFD crowd took the opportunity to step back in to the low volume market, partly encouraged by confirmation that Q3 Gross Domestic Product (GDP) increased at a seriously impressive 4.9% rate and growing speculative optimism about the following day’s inflation report. By the time the closing bell sounded, most of Wednesday’s losses had been recovered.

Friday was all about the Core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s very definition of what inflation actually is. We learned that it barely rose at all in November, increasing by just 0.1% from a month earlier after a downwardly revised 0.1% gain in October. From a year ago, it advanced 3.2%. Indeed, if you look at it just over the past six months, this definition of inflation is running at only 1.9% annualized, actually below the Fed’s 2% target.

This was splendid news for the Fed and appeared to justify their decisions not to raise interest rates at any of their last three meetings, but the central bank still remains cautious. Markets, however, are throwing that caution to the wind and seem pretty much ready to declare victory and job done in the war on inflation. The major indexes were pretty flat on the day, but this was not surprising for a low volume final session before a three-day Christmas weekend.

The stock market has been rallying for one primary reason: Falling Treasury yields (and as a result, lower interest rates). The anticipation of future interest rate cuts has become so strong that it has even helped markets disregard several quite concerning corporate earnings reports.

Astonishingly, following its December meeting, the Fed didn’t just confirm market expectations of rate cuts in 2024, it actually increased them. The Fed itself signaled one more cut than what was realistically expected and it formally signaled rate hikes are over. It essentially abandoned, after just a few months, its whole looming threat of “higher for longer” interest rates.

Since its October 27th low, the S&P 500 has surged more than 15%. So, in the end, the market rallied because the Fed essentially wiped away the whole reason for the sharp drop in stock prices that we experienced from August to October.

Can this rally continue? Yes, but it’s not in the Fed’s hands any more. Markets have aggressively priced in definitely no recession and no meaningful slowdown, but that’s premature. The economy could easily slow and indeed there are some signals that this is already happening.

With its recent positive pivot, the Fed has now fired its final bullet. Frankly, it is no longer able to help markets now if worries about a serious economic slowdown emerge. So close attention to upcoming economic data is absolutely essential for gaining a sense of where the stock market is heading.

OTHER NEWS ..

The Best In The World .. The world’s best performing stock this year is a South Korean electric vehicle supplier. Shares of Ecopro comfortably beat the rest of the 2,647 member Bloomberg World Index - delivering returns of 571% this year, despite having actually fallen 50% from its peak in July. Last year’s winner PT Adaro Minerals Indonesia, which had a 1,595% gain in 2022, fell 19% in 2023.

The Best, The Worst And The Busiest In The World .. In a survey of nearly 16k travelers at airports around the world as reported by Bloomberg, Muscat International airport in Oman was named best airport in the world. The highest ranked U.S. airport was Minneapolis-St. Paul International which came in at #13. Fresh from spending $8 billion on renovations, New York LaGuardia only placed 70th but still well ahead of New York JFK which finished in 106th place.

The worst airport in the world according to the survey is Banjarmasin Syamsudin Noor International airport in Indonesia, but also gracing the list of the bottom ten airports on the planet were London Gatwick and Toronto Pearson.

The busiest airport in the world remains Atlanta Hartsfield-Jackson, followed by Dubai International, Tokyo Haneda and London Heathrow. The world’s busiest international route was Kuala Lumpur <> Singapore. The flagship trans-Atlantic route, London Heathrow <> New York JFK, dropped from fourth place to eighth.

UNDER THE HOOD ..

The intensification of Demand in recent weeks has been very promising and is very different from what we saw in 2023’s previous index rallies which generally failed to be accompanied by such a demand expansion. The percent of stocks hitting new one year highs exploded to levels not seen since June 2021, reaching 19% on December 14th.

The greater the number of stocks reaching new highs with the indexes, the more broad-based the Demand intensity is. Contrary to popular belief, markets do not tend to top out when this figure is elevated. Rather, market usually turn down following months of dwindling new highs.

Things having been going berserk in Small Cap world. Just 48 days after hitting 52 week lows, the Russell 2K Small Cap Index hit 52 week highs. That has never happened before in such a short period of time.

Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.

THIS WEEK’S UPCOMING CALENDAR ..

Stock and bond markets will be closed on Monday for Christmas and the calendar will be pretty empty.

There will be Home Price Index numbers to look forward to but the earnings calendar is quiet. Q4 earnings season doesn’t kick off until January 12th with results from JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo.

ARTICLE OF THE WEEK ..

Rich A…

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Stocks had another terrific week, boosted by the interest rate cut-friendly tone of the Federal Reserve and its Chair Jerome Powell on Wednesday. The S&P 500 moved higher for the seventh consecutive week, something it hasn’t done since 2017. The NASDAQ-100 ended the week at a new all-time record high, something that would have seemed unthinkable just a year ago at the end of a catastrophic 2022. The best performing stocks last week, however, were the Small Caps.

Monday saw stocks move higher to further new 2023 highs, with the generic all-encompassing indexes like the S&P 500 following through strongly on the momentum from the end of the previous week on the back of continued hopes for a “bending-but-not-breaking” economy and optimism about the following day’s inflation report. Some profit-taking following recent surges in tech and Small Cap stocks caused the performances of the NASDAQ-100 and the Russell 2K indexes, respectively, to lag somewhat over the course of the session.

Before the opening bell on Tuesday, we learned that the Consumer Price Index (CPI) measure of retail inflation is starting to show a few signs of stickiness, notably in areas such as rent, medical care and car insurance. Consumer prices rose 3.1% year-on-year, with the all-important Core number (which excludes food and energy prices) rising 0.3% in November for a 4.0% annualized rate, unchanged from the previous month’s reading. While this mixed bag did not seriously damage Wall Street’s expectation for early 2024 interest rate cuts, it didn’t exactly support it, either.

With the Fed interest rate decision, Powell’s press conference and the publication of the Dot Plot looming the following day, the market initially seemed reluctant to take a stand one way or another based on the CPI data during Tuesday’s session - but then investors did what they have consistently been doing lately and defaulted to looking on the bright side of things and stocks eventually moved higher again, deeper into record high territory for 2023.

The big day finally arrived on Wednesday. Obviously, there was no change made to interest rates for the third meeting in a row, no surprise there. But both the language from Powell at his press conference and the publication of the Fed’s quarterly Dot Plot were pleasant surprises to those yearning for a swift end to the Fed’s recent restrictive policies.

Powell finally signaled that the cycle of monetary tightening that has whip-sawed markets and the economy for the last couple of years is, to all intents and purposes, over. He notably did not seem to push back on the idea of the death of the “higher for longer” narrative or the hope of multiple interest rate cuts in 2024, indeed he even kind of embraced it.

Traders also cheered the tweak to the Dot Plot, which showed most Fed officials now anticipating a reduction of 0.75% in the Fed Funds rate next year - a much sharper pace of cuts than indicated back in September.

Stocks immediately screamed higher, turbo-charged by a solid fall in Treasury interest rates. Mortgage rates dipped back below 7% (see below). The S&P 500 broke up through 4700 and the NASDAQ-100 extended its incredible 2023 surge to over 50%. Small Cap stocks had an even better day.

On Thursday, US stock markets initially rocketed higher again on a momentum follow-through from Super Wednesday, as it was already becoming known within 24 hours, with Small Caps once again taking the lead. As the day wore on, though, signs emerged of exhaustion and some profit-taking in what was clearly a short-term overbought market and the indexes finished only modestly higher.

The European Central Bank (ECB) and the Bank of England (BOE) followed the Fed’s lead as expected, both holding the line and leaving their interest rates unchanged. The messaging was very different though. If Powell was the U.S. market’s jolly Santa on Wednesday, happy to entertain the idea of rate cuts, ECB President Christine Lagarde and BOE Governor Andrew Bailey were far more Grinch-y in their statements.

Interviewed on CNBC on Friday morning, New York Fed President John Williams tried to pour a little cold water on the inferno of optimism by calling the idea of a March 2024 interest rate cut “premature” and, bizarrely, even seemed to deny some of what Powell had quite clearly said on Wednesday. Strange as it was, William’s statement did succeed in removing some of the froth and the S&P 500’s six-day winning streak finally came to an end as it eased back a fraction. However, the NASDAQ-100 (the index of the largest one hundred NASDAQ-listed stocks, excluding financials) still managed to advance to finish the week at its new all-time record high.

Stock markets are in full-on party mode, with little appearing able to derail a march higher recently. Earnings are growing again. Formerly lagging sectors like real estate and financials are rallying hard, playing solid catchup. Lagging styles and investing disciplines like Small Cap Value and high dividend stocks are rewarding the poor managers who’ve had to sit and watch the Magnificent Seven stocks soak up all the gains and headlines in the first 10 months of the year. Even international stocks are going higher.

Investors right now very firmly believe that 1) growth won’t slow materially and 2) the Fed will cut rates in March or May. In the short term (meaning before year-end) this strong belief is the stock market’s super power because it allows investors to safely ignore anything that contradicts that narrative, as long it doesn’t contradict it too strongly.

Last week’s CPI report is a perfect example. Headline inflation barely declined and Core CPI literally didn’t decline at all and is still running at double the Fed’s target (4.0% vs. 2.0%). Yet, stocks didn’t mind and took off because the report didn’t provide a negative enough surprise to break the current belief in 1) a soft landing and 2) imminent and meaningful interest rate cuts.

However, as we start 2024 with a clean slate and investors will have to start thinking properly again about economics, earnings and elections, the burden of proof will shift to the bulls and the whole concept of “as long as news is not disastrous, then it’s really good” will not cut it any more once the New Year’s celebrations are done. Pivots like the one we just saw only work once. And the Fed just used it. 

OTHER NEWS ..

A Busy Week For Elon .. Elon Musk had an interesting week. He started out deservedly copping tons of crap for reaching the astonishing judgment that somehow it would be a really good idea to let appalling conspiracy theorist Alex Jones back onto X/Twitter so he could resume spewing lies and brain-dead toxic nonsense to all his dopey followers. Musk chose to even celebrate this bonkers decision by joining Jones and self-styled hate influencer Andrew Tate (currently under indictment for multiple rapes, assaults and human sex trafficking and also inexplicably reinstated by Musk), on a cuddly “welcome back” audio chat on the platform.

Musk is still desperately trying to repair the damage caused by his own recent burst of ill-timed anti-semitism (including a desperately awkward PR-advised apology tour to Israel) which - along with the fact that their ads on the platform were appearing next to pro-Nazi and white supremacist content - generated a massive boycott from the platform’s biggest advertisers.

His ridiculous antics seem to have finally come to the attention of Apple and the suggestion is that X/Twitter is teetering on the brink of being kicked out of the App Store for multiple rule violations.

Musk’s other play-thing, Tesla, was forced last week to recall more than 2 million vehicles after the National Highway Traffic Safety Administration determined its driver-assistance system Autopilot doesn’t do enough to keep drivers engaged. We also know that surveys are showing that U.S. consumers are simply not very convinced by the electric vehicle use case, given the associated high prices of ve…

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For the first three days of last week, the market’s price action felt a bit like a head-thumping hangover the morning after the month-long bender that was November. Then on Friday we got a very Goldilocks Jobs Report which sent prices spiraling upwards again and the S&P 500 had managed to squeak out a new 2023 high by Friday’s close.

A majority of S&P 500 stocks moved higher on Monday, but the index fell - dragged lower for once by the so-called Magnificent Seven (Apple, Microsoft, Alphabet/Google, Nvidia, Meta/Facebook, Amazon and Tesla) all of whom fell by more than 1% for the session.

A narrative developed, bolstered by some of the talking-head types on CNBC and Bloomberg TV, that maybe the expectations of when and by how much the Fed will begin cutting interest rates may be the teeny-tiniest bit over-optimistic and that when the Fed loudly insists that it will not go on a drunken, indiscriminate rate-slashing spree in the first half of 2024, there’s at least a small chance that they might actually mean it.

On Tuesday, we learned from the latest Job Openings and Labor Turnover Survey (JOLTS) that the number of job openings in the US dropped to 8.73 million in October, down from September's 9.55 million, the lowest level since March 2021 and well below the expectation of 9.40 million. Bond yields responded by coming down sharply with the 10 year Treasury interest rate, which had been over 5.0% as recently as October, falling below 4.2%. The S&P 500 index ticked lower again but most of the Magnificent Seven came right back, reversing Monday’s losses.

Wednesday saw another moderate drift lower in stock prices, completing a three-day losing streak for the first time in over a month. Indexes were driven lower partly by their energy-related components as the oil price dipped below $70 on excess supply concerns and a continuing sense that November’s meteoric rise in stocks may just have been overdone and that the upside from here could be more limited as a result.

Artificial Intelligence re-emerged as a market influence on Thursday as both Google and AMD announced new AI-related initiatives. There’s absolutely nothing 2023’s stock market loves more than even a sniff of a mention of anything to do with AI and all the indexes shifted higher, bringing the short losing streak to an end in the lead-up to the all-important Jobs Report the following day.

It landed before the market open on Friday. Payrolls rose 199k in the month, a little above estimates. The unemployment rate fell to 3.7%, below all forecasts and a four-month low as well as extending an historic 22-month stretch in which it has remained below 4% — the longest since Neil Diamond first let us know that good times never felt so good as they did with Caroline in 1969.

The combination of last week’s two big labor market reports keeps current interest rate expectations (no more hikes, cuts coming up pretty soon) in place and did not imply a loss of momentum. In other words, it didn’t really move the needle much and keeps the soft landing thesis very much on the table. We also got a consumer sentiment reading that soared higher as Americans grow more and more confident about where the economy is heading. Stocks moved higher on the back of this feast of good news.

Generally speaking, once Thanksgiving is in the rear view mirror, market participants simply want the year to end quietly, with no surprises and perhaps a few decent gains. The net result is that markets tend to temporarily ignore any data or commentary that might jeopardize the gains (assuming it’s not too bad) and embrace any data or commentary that pushes the bullish narrative, into year-end. I think we are in the midst of that right now, as shown by the bubbly reaction to a couple of AI stories and some pretty good, but hardly sensational, labor market news.

Once this peculiar period ends and January gets under way, things tend to normalize again. What will that normalization look like in early 2024? I think it is all less complex than it seems and will mostly be about expectation vs. actual facts.

Put very simply, if actual facts about economic/inflation data, earnings, bond yields and Fed interest rate policy turn out better than market assumptions, stocks will likely rally. If the actual facts disappoint compared to market assumptions - particularly if the baked-in idea of early rate cuts does not come to pass - then stocks will probably drop, maybe quite hard.

OTHER NEWS ..

Dow Left Behind in 2023 .. Sharp-eyed subscribers will have noticed that, while I frequently refer to indexes like the S&P 500, the NASDAQ and the Russell 2000 in my reports, I do not ever talk about the media’s favorite index, the Dow Jones Industrial Average. That’s because it’s a stupid index. It also hasn’t under-performed the far-superior S&P 500 by this much at any time since the end of the century.

While focusing on one year’s worth of performance data and drawing big conclusions is never a good idea (see ARTICLE OF THE WEEK below) it’s still interesting to note that the olden-timey classic Dow gauge of market performance is up only 10% this year, half that of its big S&P brother, whose 2023 performance itself is only half that of the NASDAQ-100. The biggest reason? The much heavier tech and communications services presence in the S&P 500's and especially the NASDAQ-100’s composition. 

Why bother? .. The useless end-of-2024 predictions for the S&P 500 keep coming in. Their record of accuracy is rubbish. For the last five completed years, the prediction vs. actual outcome error ranged from 26% too low to 21% too high. On average, the median annual estimate was off by about 18 percentage points! That’s nearly double the index’s long-term average annual return. Please don’t take any notice of this stuff.

Like A Bad Smell .. Meme stock favorite and nonsense company GameStop came back into our consciousness last week. The good news for the “diamond hands” shareholders who bought in using their Robin Hood accounts during the pandemic, slurped all the Reddit-fueled Kool Aid and held on is that the stock surged 20% on Thursday alone. It’s also up 30% since Thanksgiving. The not-so-good news is that it is also still down more than 82% from its high in 2021.

Three Trill .. Shares of the technology giant Apple rose to close the week at $195.72 which put its market capitalization at over the $3 trillion level (that’s $3,000,000,000,000) and was its highest close since its all-time high in back in July.

UNDER THE HOOD ..

Buying Power’s path of least resistance remains to the upside after having reached new multi-month highs in recent days. However, Selling Pressure has a tendency to strengthen as indexes reach new high-water marks, such as the new 2023 high experienced by the S&P 500 last week. Sometimes the sellers only stick around for a short while, but it does make continued price acceleration harder.

Selectivity is still apparent, favoring Large Cap stocks, but buyers are beginning to find new targets in the Mid Cap and Small Cap space, narrowing the Large/Small gap. While core technical indicators still have work to do to erase negative divergences in place since July, a continuation of this recent resurgence in smaller stocks, thanks to their larger numbers, will be crucial for market-wide improvements in Demand and a sustained intermediate-term advance.

Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.

THIS WEEK’S UPCOMING CALENDAR ..

This week is the last big one of the year when it comes to data, headlined by the Federal Reserve's December rate meeting with a decision due on Wednesday afternoon. The market overwhelmingly expects it to keep the Federal Funds rate steady at a target range of 5.25%-5.50%.

Attention will be on Chairman Jerome Powell's press conference that afternoon and on the Federal Open Market Committee's latest quarterly so-called “Dot Plot”, the Fed officials' latest projections for the economy and the mem…

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Stocks closed out a truly spectacular November last week with the S&P 500 index finishing about 9% higher than it was at the beginning of the month. Tech stocks were the best performers by sector, but real estate came a close second - despite the cratering post-pandemic commercial space. Energy was the worst performer, falling 2% in line with very weak oil prices and was the only sector with a negative outcome for the month.

Monday proved to be a rather forgettable session, with prices trapped inside a narrow range, eventually finishing a touch lower. The only thing of interest going on was the trickle of data releases on all the shopping being done the previous week. The biggest takeaway from the early data was that consumer spending could be up handsomely from last year and that (shocker!) we are all doing more of our shopping online rather than braving actual stores.

Some of the good vibes returned on Tuesday. A report showed that consumer confidence increased in November after having fallen for three consecutive months. Fed-speak was generally supportive also. Federal Reserve Governor Christopher Waller said policy is well positioned to return inflation to the Fed’s 2% goal and his colleague Michelle Bowman deftly avoided answering when directly asked if there would be another interest rate hike. Most stocks took another small leg higher.

More encouraging Thanksgiving-related data came out on Wednesday. Over 200 million U.S. consumers participated in weekend shopping, that’s 18 million more than expected and more people travelled through U.S. airports in a single day on Sunday than ever before.

But the big news of the day was that the second of three official estimates indicated that the U.S. economy grew faster in Q3 than even optimistic analysts had thought. Gross Domestic Product (GDP) rose at a mind-bending 5.2% annualized pace, up from the previous estimate of 4.9%, more than double the previous quarter’s growth rate and the fastest since the economy began rapidly accelerating out of the depths of the pandemic two years ago. Consumer spending also grew, but at a less-breakneck rate of 3.6%. After initially jumping higher on the data, stock prices faded in the afternoon to finish largely unchanged.

Before the market opened on Thursday, we learned that the Fed’s darling inflation measure, the Core Personal Consumption Expenditure (PCE) index, came in as expected at a year-on-year 3.2% and the annualized rate over the last six months has now fallen to 2.5%, pretty much putting the final nail in the coffin of any chance of an interest rate hike on December 13th at the Fed’s final rate-setting meeting of the year (see FEDWATCH INTEREST RATE PREDICTION TOOL below). Stocks ticked higher again.

Friday marked the beginning of the final month of 2024 and Decembers have traditionally proved pretty generous to stock investors. And we got off to a solid start this year, following a speech from Fed Chair Jerome Powell, making the rather innocuous, not-very-startling statement that he believed the central bank's recent policies have helped bring down inflation. But in the current giddy glass-is-half-full environment, this was seen to even further bolster the case that policymakers won't raise interest rates any further.

Stocks took their cue from this interpretation and all the indexes finished the day meaningfully higher, with Small Caps in particular outshining the rest.

The end of 2024 guesstimates for the S&P 500 are rolling in .. much of what I’m seeing clusters near a record-busting price target of close to 5000 (the all-time high is 4796, reached on the first trading day of 2022), with some of them as high as 5400 and remarkably few predicting lower prices than where we are now.

The index closed on Friday at around 4595, so a 5,000 level on New Year’s Eve 2024 implies a rally of 8.8% over the next thirteen months. This is not far from the historical average gain per year for the index but, if accomplished, would represent a rather impressive total two-year gain of more than 30% from the end of 2022 to the end of 2024.

Interesting factoid for 2024 crystal ball-gazers; in election years of first-term presidents, whether they get re-elected or not, the stock market has historically moved higher literally 100% of the time.

The bullish argument for stocks can largely be summed up by; Everything that’s already priced in actually happens. Because a lot of it hasn’t yet. Bulls are anticipating; no economic slowdown, immaculate disinflation, resilient corporate earnings continue to beat expectations and a healthy dose of interest rate cuts from the Fed in 2024 and beyond.

The bearish argument for stocks can largely be summed up by; Everything we were worried about for 2023 actually ends up happening in 2024. In other words, the long list of concerns for 2023 weren’t misguided, they were just early. Bears are anticipating (much as they were a year ago); economic growth actually contracts leading to a recession, inflation stops falling and maybe even ticks back higher again, corporate earnings growth disappoints and the Fed does not cut interest rates as soon or by as much as expected.

We should remember that outcomes are rarely binary and elements of both theses will probably come to fruition, but these are the factors to keep an eye on which - along with any kind of unpredictable external shock and I think the inevitable craziness that will accompany the U.S. presidential election - will determine how accurate these year-end 2024 price target guesses end up being.

OTHER NEWS ..

Riddle Me This .. On Monday, we got data that showed that the median price of a new home had plunged 18% year over year. Then the next day, we were told that existing home prices rose for an eighth straight month, surging to a new record high.

Put that all together and housing prices are .. rising? Falling? It depends? Everyone expected home prices to fall when mortgage rates shot up to 8%. But it turns out that most American homeowners had already locked in a mortgage interest rate far below today’s and have no intention of giving that up, meaning hardly anyone is selling. This lack of inventory has led to bidding wars and higher prices for existing homes.

Builders, meanwhile, have now started trying to fill that gap with accelerating new construction and the market for new home sales has had a different dynamic altogether.

The housing/shelter component is about a 40% weighting in the Core Consumer Price Index (CPI) reading. Without lower price inflation in that category, it is going to be hard for the Fed to reach its target of bringing inflation back down to to 2%.

New Blood .. Joining the S&P 500 index on December 18th in one of its occasional reconstitutions will be Uber, Jabil and Builders FirstSource. Booted out to make way for these three new members will be Sealed Air, Alaska Air and SolarEdge Technologies.

Apple Pulls The Plug On Goldman Sachs .. The tech company recently sent a proposal to the Wall Street investment bank announcing its intention to exit their credit card and savings account partnership contract in the next 12 to 15 months, according to a Bloomberg report. This contract had previously been extended through 2029 just a matter of months ago.

The end of the much-heralded cooperation initiative which began with the Apple credit card in 2019 and then the high yield savings account earlier this year is the final nail in the coffin of Goldman's doomed bid to expand into consumer lending which was launched back in 2016 with the introduction of the Marcus savings account.

UNDER THE HOOD ..

It is important to remember that the market deals in probabilities, not certainties. That’s where certain forms of technical analysis can be useful, but frequently it exposes two sides of a coin. This is one of those times.

The continuation higher in the last two or three weeks of the percentage of stocks trading above their Long Term Moving Averages (see below) is consistent with a f…

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Stocks moved higher last week for the fourth week in a row with the major indexes ending the holiday-shortened week up by about 1%. The sense grew that the typical year-end Santa Claus rally may possibly have begun even before Thanksgiving. But trading volumes were so low that drawing any real conclusions from last week’s activity would be a fool’s errand.

No news was good news on a slow, drama-free Monday. Stock indexes drifted steadily upwards on low volume throughout most of the trading session to close near the highs of the day. 2024 brings a host of unanswered questions, but right now that's a problem for another day. In the near term, what's not to like?

Stocks floated gently lower in another bland session on Tuesday. The often closely-scrutinized minutes from the most recent Fed meeting were released and were met with a huge yawn. There was far more excitement and anticipation about Nvidia’s Q3 earnings due out after the closing bell that day.

This reflects an ongoing shift from the market’s previous laser focus on every single little thing that the Fed is saying or doing to starting to care more about what is actually happening on the ground when it comes to corporate earnings and outlook, especially in the case of those dominant companies in the so-called Magnificent Seven (Apple, Microsoft, Alphabet/Google, Nvidia, Meta/Facebook, Amazon and Tesla).

When it came out, Nvidia’s Q3 earnings report was once again astounding. Its reported revenues of $20 billion blew away analysts’ estimates, but it is a sign of how far ahead the market has got of itself that investors’ first instinct was to sell the stock (which was up over 240% year-to-date at the time) because it obliterated expectations by slightly less than it might have and there are enormous amounts of good news already baked into the price. Nvidia has clearly set a very high bar for itself.

Tuesday’s losses were erased by gains on Wednesday in yet another low-volume snoozer on Thanksgiving Eve with only a muted response to Nvidia’s numbers. Stocks were driven to their highest levels since early August mainly by a solid day for Microsoft on the back of the absurd and tiresome saga of Open AI and Sam Altman. Markets then made a brief return from turkey day on Friday, ending the abbreviated session mixed and little changed in very thin trading.

While last week’s stock market activity was extremely uninteresting and uninformative, there is an important change to be aware of. Regular readers will know that I always talk of the Three Pillars upon which 2023’s stock rally has been built, that is: 1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes.

The hypothesis is that as long as these three pillars all remain solidly in place, we are unlikely to experience a meaningful market decline as it is these factors that have driven the market higher this year. But if they all begin to crumble then look out below, because stocks are only as high as they are based on the premise that these pillars are all valid and continue to be so (which is currently the case).

Events have moved on and there is now an adjustment to the definition of the third pillar. “Fed Done/Almost Done with Rate Hikes” has (absent some kind of major external shock) now become “Interest Rate Cuts Sooner Rather Than Later”.

The Fed may well confirm at its December meeting that they are “done” with rate hikes for the foreseeable future and with that confirmation comes new risks.

Put simply, the gap between what the Fed says it plans to do (cut rates just once at some point in 2024) and what the market expects it to do (cut rates at least three or four times next year, starting as soon as about May) is extremely wide and disappointment on the part of a market that has essentially already priced in its view of events could lead to a troubling outcome for stocks. We need to keep a close eye on this now-adjusted pillar alongside the other two.

OTHER NEWS .. MORE BROS BEHAVING BADLY EDITION

Another One Bites The Dust .. While the financial media furiously focused last week on the tedious story of a bunch of AI nerds and their complete inability to figure out how to run a business, the real story of the week was that yet another earthquake shook the corrupt rubble that is what remains of crypto world.

The world’s largest crypto exchange, Binance and its CEO Changpeng Zhao (known in bro-world of course as CZ) pleaded guilty in federal court in Seattle on Tuesday to multiple money-laundering and sanctions violations, including enabling and facilitating transactions for illicit groups such as ISIS, Al Quaeda and more.

Prison-bound CZ will step down as CEO and personally pay a $50 million fine after pleading guilty to violating the Bank Secrecy Act. The firm itself will pay fines of $4.3 billion in one of the largest ever monetary penalties ever imposed in U.S. history.

Unlike FTX (the world’s second largest crypto exchange before its collapse last year under recently-convicted fraudster Sam Bankman-Fried), the Binance exchange will be allowed to keep operating, but under new management.

Crypto’s two biggest pin-up boys are now both convicted felons. The two largest crypto exchanges have now been shown to have operated as useful tools for drug dealers, child traffickers, extortionists and international and domestic terrorists as well as sewers of corruption and fraud where billions of dollars of client assets were completely unsafe from misuse and outright theft.

This nonsensical libertarian utopia with zero regulation has come crashing down and will hopefully soon be replaced with transparent and highly-regulated securities under close and constant scrutiny from the Securities and Exchange Commission (SEC) such as exchange traded funds and transactions carried out on properly-controlled established exchanges that actually have a long list of rules for all participants and strict customer protections for those looking to gain exposure to the crypto ecosystem.

And In More Ridiculous Tech Bro News .. Tech entrepreneur and self-driving car pioneer, Anthony Levandowski, is rebooting his AI church in a renewed attempt at creating a religious movement focused on the worship of artificial intelligence, according to Bloomberg News.

Levandowski’s so-called “Way of the Future” was founded in 2015 but shut down a few years later. According to him, the congregation at the new church, which shares the original’s name, has “a couple of thousand people” who apparently all meet up to build a “spiritual connection between humans and AI”. Big eye-roll.

UNDER THE HOOD ..

Last week’s price action moved the reading for Buying Power back above that of Selling Pressure for the first time since mid-September.

However, history reminds us that most selective Demand environments like the one we are experiencing, eventually give way to major market tops, but on an unknowable time horizon. Investors need to recognize that the market’s strong buying preference is still mostly for quality mega-cap stocks. While “the rest” could feasibly catch up with “the best” , it is historically more typical for Demand to finally recede from the strongest stocks, bringing them back down closer to the level of the rest of the pack.

Last week, even as the S&P 500 index got to within 1% of the one year high that it reached in July, there were still more stocks that were 20% or more below their one year highs (39%) than stocks that were 10% or less below their one year highs (36%). This is a highly significant and meaningful divergence, emphasizing yet again that there are still plenty of stocks not really participating in the current rally to the extent that you would expect and that is not a formula for a sustainable turnaround. We need that percentage to explode much higher and quite soon if we aren’t to see a rather meaningful slump in stock prices.

The party is still ongoing, but the music may be slowing.

Anglia Advisors clients are welcome to reach out…

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Good news for stocks erupted all over the place last week. We saw slowdowns in the Consumer Price Index (CPI) measure of retail inflation and the Producer Price Index (PPI) measure of wholesale inflation faced by manufacturers, we saw the (temporary) avoidance of a government shutdown, we saw continued mostly impressive earnings, particularly from Target (TGT) which soared 18% in a day and plummeting market interest rates. Everywhere you looked there were reasons to buy stocks.

Markets opened the week on Monday in a rather somber mood, following the previous Friday’s outlook downgrade for the United States from Moody’s Investor Services. But attention soon shifted to the week’s main event and next big narrative catalyst, the release of the CPI report the following day. There are still those who believe in the concept of Immaculate Disinflation and that Tuesday’s data might bolster that belief and it was this kind of optimism about the upcoming inflation data that stabilized things and stocks finished the day largely unchanged.

When it arrived pre-market on Tuesday morning, we got what was in every sense of the word a very cool CPI report. There was zero inflation in October as consumer prices remained unchanged from September. The increase in the headline rate over the year through October was 3.2%, markedly lower than the 3.7% pace from the previous month. The all-important (to the Federal Reserve) Core CPI reading, which excludes food and energy costs, rose by 0.2% in the last month for a slightly lower annualized rate of 4.0%.

Almost everything about the CPI report was better than expected and appeared to justify a reduction in concerns about a re-emergence of high inflation. It also reinforced to investors that the second of the Three Pillars of the Rally (1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes) was still very much in place and it helped the Immaculate Disinflation believers cling to their faith.

As such, it likely eliminated the possibility of another interest rate hike from the Fed (see FEDWATCH INTEREST RATE PREDICTION TOOL below) and caused investors to now anticipate rate cuts sooner and larger than previously expected.

Unsurprisingly, financial markets fell madly in love with the report, especially when paired with the slowly but steadily rising jobless rate. Treasury yields plunged at the open and stocks exploded upwards out of the gate and kept flying all day.

The green-on-the-screen carried into Wednesday, by which time markets had digested the news from the previous evening that, despite some quite extraordinary in-fighting among Republicans (in a couple of cases, almost literally), the House had passed legislation to avert a government shutdown (later overwhelmingly confirmed by the Senate), even if once again it was just kicking the can down the road.

This time it was a “laddered” resolution out until February 2nd of next year - which ironically enough is Groundhog Day. There’s clearly no long term joined-up thinking going on here, this is just how things are likely to be with Congress and shutdowns going forward.

Do nothing for weeks or months → Last minute brinkmanship and grandstanding → Lots of yelling → Short term Band-Aid → More yelling → Rinse and repeat.

More economic data emerged and we saw that PPI is confirming the lower inflation narrative and Retail Sales fell slightly - both further pushing the idea that the Fed couldn’t possibly think about raising interest rates again. All these tailwinds meant that stocks finished Wednesday a touch higher, instead of suffering any whiplash from Tuesday’s monster rally as often happens after days like that.

Stocks took a breather on Thursday, particularly Small Caps which gave back a chunk of their impressive gains from Tuesday, while all the other indexes finished basically flat on the day. Friday was similar, with rudderless sideways trading for the entire session - the only difference this time was that Small Caps went and out-performed the other indexes this time. The relative dullness of the last two days of the week can actually be viewed as a positive as the massive gains of earlier in the week were maintained into the weekend.

This latest stock rally is an example of the stock market aggressively pricing in what it wants to believe, namely that the Fed will soon turn dovish and interest rates will fall both imminently and meaningfully. Wall Street once again totally disbelieves the Fed whenever it talks of higher-for-longer interest rates and last week’s CPI and PPI reports have only emboldened it’s stance.

Will under-invested institutions needing to jump on board the stock train by year-end chase this stock market higher into a solid or even spectacular Santa Claus rally? Very possibly. But the wide gulf that exists between what the Fed is saying and what the market believes it will do does makes stock prices highly vulnerable to any severe disappointment if it begins to look as if the Fed is winning that particular arm-wrestle.

In this regard, put a big X by December 13th on your calendar, because that’s when we get to see the next quarterly Fed “Dot Plot” of the Fed committee members’ interest rate change expectations for 2024 and beyond.

OTHER NEWS ..

X Marks The Troublespot .. Apple, Disney, IBM, Sony, Comcast, Warner Brothers, Paramount, Lions Gate and the European Union are among those rushing for the exits at X/Twitter as they all suspended their advertising on the platform after a Media Matters report confirmed that their ads were frequently running alongside pro-Nazi posts.

The list of runaway advertisers may well be longer by the time you read this. The report said that multiple other firms are also suffering the same fate and many of them appear to be considering joining the exodus of those abandoning the ailing social media channel.

Meanwhile, the situation has been compounded and the exit rate accelerated by the fallout from X/Twitter owner Elon Musk enthusiastically endorsing anti-semitic and white supremacist conspiracies while attacking and abusing the Anti-Defamation League on his own platform. A number of major Tesla shareholders came out to express that they are losing patience with South African-born Musk’s increasingly “bizarre and detrimental” behavior with some of them openly championing the idea of his removal as chairman.

Tesla stock has basically been on a wild ride to nowhere for the last three years, so their frustration is understandable. The price closed on Friday right around where it was on New Year’s Eve 2020. It swiftly lost over $40 billion in market value after Musk’s ill-advised comments first appeared on Wednesday.

Grim News in CRE .. Foreclosures are surging in riskiest corners of commercial real-estate financing, offering one of the strongest signs yet that the turmoil in the property market is worsening. Lenders this year have issued a record number of foreclosure notices for high-risk property loans, according to the Wall Street Journal. Many of these loans are similar to second mortgages and commonly known as “mezzanine loans”. The increase in mezzanine loan foreclosure announcements matters because it offers a more immediate measure of commercial real estate distress than mortgage foreclosure rates.

Oh no, Oreo! .. Suspicion over subtle changes to Oreo cookies has prompted some fans to protest what they believe is one of the biggest inflation scandals to date: “Double Stuf” Oreos with just a normal amount of creme and then less in the original-sized versions. Some Oreo enthusiasts are posting videos online of twisting the cookie open to reveal a more scarce filling. Snack giant Mondelez, the maker of the world’s best-selling cookie, promises it hasn’t tinkered with the creme ratio, but “always welcomes feedback from consumers”. Hmmm.

UNDER THE HOOD ..

Tuesday’s super-surge in stocks went a long way to resolving some of the negative divergences in technical key indicators that had develope…

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A rather uneventful week was saved by a solid final day, although arguably the biggest event came after the close on Friday when a U.S. credit rating outlook downgrade was announced.

Stocks and bonds spent Monday aimlessly meandering around, looking for fresh direction following the previous week’s fiesta. Both Blackrock and Morgan Stanley were quick to come out with warnings that the end of October/early November super-rally could well swiftly reverse.

Tuesday was not much different. After another day of mostly directionless trading, the S&P 500 closed a little higher as Treasury yields and oil prices continued to trundle lower. The shift lower in the price of oil, which is flirting with multi-month lows, has caught a lot of people by surprise.

Given the turmoil in the Middle East and risk of the conflict turning into more of a regional crisis, the conventional wisdom had been that oil prices were going to move sharply higher and remain elevated. The exact opposite has happened, implying that geopolitical concerns are taking a back seat to growing fears of declining global demand for oil.

On Wednesday morning, Fed Chair Jerome Powell said precisely nada in a “nothing-burger” of a short speech. After initially resuming their trajectory of drifting gently higher, stocks eventually ran out of steam later in the day but with a late grind higher, the S&P 500 still managed to squeak out a minuscule gain, extending the index’s winning streak to eight trading days.

All good things must come to an end, however and the streak was broken on Thursday after Powell finally said something of substance in a climate protester-interrupted speech at the International Monetary Fund (IMF) HQ in Washington DC. “If it becomes appropriate to tighten policy further, we will not hesitate to do so,” is hardly a new revelation, but still served as a reminder to markets that the Fed has not yet formally issued an all-clear when it comes to raising interest rates. Market interest rates spiked and stocks bled lower all day in response.

On Friday after the market close, the United States’ credit rating outlook was downgraded from “stable” to “negative” by Moody’s Investors’ Services, following Fitch Ratings recent lead. The U.S. now has the same credit rating outlook at Moody’s as, for example, Argentina, El Salvador, Ukraine and Papua New Guinea. The credit ratings agency’s decision resulted from a recognition of the fact that, by the time you read my next weekly report, this country may not have a fully-functioning government thanks to the apparent willingness of Team Burn It All Down in Congress to throw the entire nation under the bus for their own political ends.

This followed what had been a remarkably solid day for markets as stocks rebounded hard, including a new all-time high for Microsoft (MSFT) as attention returned to October’s oversold conditions and a mostly very solid earnings season - and the recent sharp pullback in market interest rates resumed after Thursday’s hiccup.

This is a market searching for “what’s next?” and Moody’s may have just provided an uncomfortable answer to that. Otherwise it is likely to be either a) a growth scare that sends stocks lower, maybe even towards the October 2022 lows, or b) a resumption of the soft landing and disinflation narrative that pushed stocks higher this summer. For the rest of the year at least, markets will probably be playing a game of narrative roulette as the chatter changes week by week, sometimes even day by day.

This will only intensify as mid-November marks the beginning of the silly season when pundits’ and so-called experts’ 2024 predictions (otherwise known as complete guesswork with an appallingly poor track record of accuracy) start coming out, indeed some such nonsense has started polluting my inbox already.

We have seen this effect in microcosm over the last couple of weeks when we swiftly went from being deeply oversold to getting close to being overbought. Narratives would have told you everything is looking dismal two or three weeks ago. Be afraid, be very afraid. By last weekend, the narratives were all saying everything was fabulous. Blue skies all around.

The fact is that neither narrative set was appropriate or primarily governed by the prevailing facts or data. The pendulum is swinging too far, too fast. For the market to sustainably rally from here, it still needs what it hasn’t yet received: calm in the Treasury market. Neither the short, violent declines nor the sharp rises that we have seen recently are helpful to a stock market bullish turnaround.

Looking beyond the distracting noise and confusion of the narrative roulette game, we need to remain focused on the “Three Pillars” upon which the 2023 rally has been built (1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes). The current situation reflects some mild deterioration in the overall fundamentals, but the Three Pillars remain largely in place.

Things get better if:

* data further confirms a no landing or soft landing,

* core inflation data (ex- food and energy) continues to drop at a solid pace and nears 3% year-on-year,

* the Fed further confirms no more hikes and softens its “higher for longer” language (and Treasury yields drift lower).

Things get worse if:

* Economic data rolls over and points to a hard landing,

* core inflation levels off or even bounces back higher,

* the Fed puts a near-term rate hike back on the table and the 10-year Treasury yield moves back to 5%.

OTHER NEWS ..

More Retirees Than We Thought .. Over three-and-a-half years after COVID struck, the U.S. still has around 2 million more retirees than predicted according to Bloomberg, in one of the most striking and enduring changes to the nation’s labor force.

The so-called Great Retirement induced by the pandemic is made clear in the divergence between the actual number of retirees and that predicted by a Federal Reserve’s economic model. While down from a 2.8 million gap late last year, the divergence remains elevated today and currently sits at over 1.9m “excess retirees”.

For many older Americans, leaving the labor market is a one-way street and rejoining the workforce can be difficult, if not impossible. A decline in skills and work connections as well as widespread and rampant ageism in the workplace all make it harder for many older workers to get back in the workforce. In 2022, the mean duration to find a job for people age 65 and older was over 31 weeks, 9 weeks longer than the historical average.

The $100 Billion Market To Make Everyone Thinner Just Got More Crowded .. As reported on Bloomberg last week, Eli Lilly won U.S. approval to use the active ingredient in its diabetes drug, Zepbound, as a treatment for obesity and will make it available soon after Thanksgiving. It will cost $1,059.87 for a month’s supply. That’s cheaper than Wegovy, a similar drug made by Novo Nordisk, which is $1,349 for a month’s supply, but more expensive than Novo’s Ozempic which comes in at a “mere” $936.

The mania over weight-loss drugs is drawing responses from all kinds of industries, including airlines (who are very excited about the potential fuel cost savings brought about by flying slimmer passengers), dialysis centers (who see positive kidney-related effects of drugs like Ozempic) and big box chains like Walmart (who are fretting about their grocery sales in a world where people don’t get as hungry as they used to).

Eli Lilly was prevented from marketing its diabetes drug, Mounjaro, for obesity prior to Wednesday’s approval. The promise of these drugs has boosted the stocks of Lilly and Novo, indeed Lilly is now the most valuable health-care company in the world.

UNDER THE HOOD ..

The price rally over the previous week was impressive; trading volume was up and Small Cap stocks very briefly surged, two factors notably absent over the last few weeks. But the response was limited in core technical indicators, which merely bounced somewhat within the confin…

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It was a sensational week for stocks, the best of the year, with prices rising each and every day. In the end, the S&P 500 Large Caps and Russell 2000 Small Caps both rose about 6% for the week and the NASDAQ soared 6.6%. What started life as something of a short term over-sold bounce following a largely gruesome three-month slide gained traction as the week went on, on the back of the fact that there was no interest rate hike from the Fed and earnings reports continued to impress for the most part - but mostly because everywhere you looked, there was Goldilocks economic data pointing to a soft landing.

Despite a continued ratcheting up of death and misery in Gaza over the weekend and zero apparent progress towards any kind of resolution of a looming possible U.S. government shutdown in less than two weeks’ time, an oversold condition resulting from the previous week’s carnage gave stocks hope on Monday and all the indexes moved solidly higher, helped also by falling oil prices and some strong earnings reports, including from McDonalds (MCD).

The warm and fuzzy feeling for stocks spilled into Tuesday as they drifted higher again to end the month of October on an upbeat note ahead of the Fed interest rate decision the following day, but not by enough to save us from a three consecutive calendar month decline in stock prices for the first time since those dark days of early 2020.

Heading into the Fed announcement of its interest rate decision and chair Jerome Powell’s press conference on Wednesday afternoon, stocks remained stable, bolstered by spectacular forward guidance from Advanced Micro Devices (AMD) and the release of largely unchanged and kinda Goldilocks Job Openings and Labor Turnover Survey (JOLTS) data.

The Fed duly followed the script and left interest rates unchanged for the second meeting in a row, as everyone knew that they would. Powell indulged in a rather large amount of hedging when speaking at the ensuing presser with often vague responses to journalists’ questions. He left the door open for further hikes in the future but gave no sign of imminently walking through it.

The market took this as the closest thing that we are going to get right now to a pledge that rates will not be raised any further by the Fed and Treasury yields fell hard, which boosted stocks nicely back into that long-standing recent 4200-4500 range for the S&P 500 index.

Wednesday afternoon had all the feeling of a party starting. But there were still a few poopers out there pointing out that the cops might show and break things up as early as the next day if earnings from Apple (AAPL) were to disappoint or Friday if the latest Jobs Report didn’t cooperate.

The Bank of England kicked off Thursday by following the Fed’s example and left interest rates unchanged. The conviction that the Fed is now finished raising rates over here grew even stronger as Thursday went on and stocks continued the week’s impressive rally leading into those AAPL earnings and then the Jobs Report pre-market the next morning, finishing at the highs of the day.

When it came out after-hours, the AAPL earnings report was underwhelming. The largest holding in the S&P 500 index saw its worldwide sales drop for a fourth straight quarter, marking its longest slide since U2 noticed that it was a beautiful day in 2001. The company is struggling with increasingly sluggish demand in the US and around the world. The results also suggested that Apple is facing an even bigger slowdown in China than originally feared.

On Friday morning before markets opened, the Jobs Report announced that 150k jobs were added last month, a considerable drop from the downwardly-revised 297k from a month earlier and way below what had been expected. The jobless rate rose to 3.9% from 3.8%. This was deemed to be yet another Goldilocks scenario for stocks as it doesn’t make the Fed any more likely to raise interest rates but nor does it undermine the soft landing thesis.

Stocks recently fell to multi-month lows not because of any meaningful deterioration in fundamentals, but instead because an overly optimistic outlook (in part brought about by media puffery over artificial intelligence earlier in the year) has been rattled by unpleasant geopolitical surprises, heightened U.S. political dysfunction and mega-cap tech earnings that failed to meet excessively-elevated expectations, but which weren’t bad in an absolute sense.

As long as those factors (along with higher yields) were driving the market narrative, stocks had a hard time rallying. But underlying fundamentals haven’t changed nearly as much as the decline in stocks in the last three months or so would imply.

The ingredients for a solid rebound were within grasp, and last week the market finally reached out and grabbed them after a few reminders that, broadly, the macroeconomic environment hasn’t materially changed and a soft landing is still the most likely option, although far from certain. For last week’s rally to continue, these reminders need to eventually drown out the dominant noise caused by increasingly distressing geopolitical and domestic congressional issues and the dawning recognition that the A.I. mania in the spring was rather giddy and out of control relative to reality.

At the beginning of the year, traders and investors worried extensively about a U.S. recession as the Fed raised rates by the most in decades. Not any more. Some economic “experts” are not only discarding their fears of a punishing downturn, but seeing a bigger risk that the U.S. economy will be so strong that inflation will pick back up again, forcing the Fed to keep its interest rate options open, as Powell tried to do on Wednesday.

The stock market is confidently reading things differently, however. Referring to the possibility of any further rate increases from the Fed, one senior trader summed up the view of most of Wall Street; “Put a fork in it,“ he said on Bloomberg TV, “they’re done.”

OTHER NEWS ..

Trick-or-treat inflation .. Revelers and generous householders were hit with steep prices for Halloween candy this year after poor weather from West Africa to India spurred a global shortfall of sugar and cocoa. Get your candy hit now though - it’s set to get even worse by Christmas.

Happy Anniversary Elon? .. Elon Musk spent the week in London fronting an A.I. summit (whose government organizers were publicly branded as being “mad and idiotic” to have invited him to do so) including a grotesquely cringe-worthy “fireside chat” with UK Prime Minister Sunak, while marking the one year anniversary of his purchase of X, the social media platform formerly known as Twitter.

Just one year on from Musk’s purchase, the entity is now worth less than half of what the supposed business genius paid for it. Restricted stock units awarded to employees value the company at $19 billion compared with the $44 billion Musk bought it for. Since the takeover was completed, a majority of Twitter staff have been gotten rid of or have quit, the platform has lost millions of users, it has seen the number of technical glitches and service interruptions grow at an alarming rate, changes in content rules decided on by Musk himself have resulted in a proliferation of toxic hate-speech, dangerous misinformation and dumb-ass conspiracy nonsense and it has seen its advertising revenue tank over 50%.

It’s Finally Over .. WeWork is filing for bankruptcy according to the Wall Street Journal in a stunning reversal for the flexible-office-space venture that once valued itself at $47 billion (if you haven’t yet, do make sure to watch the excellent Apple TV drama about the rise and fall of WeWork and founder Adam Neumann). The firm missed interest payments owed to its bondholders on October 2nd, forcing it into a default timeline. The extent of the domino effect on vendors and landlords of a huge long term tenant of enormous amounts of office space around the world going out of business remains to be seen, but will likely not …

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It was another pretty brutal week for stocks. Last week, the S&P 500 and the NASDAQ indexes both dropped by more than 2% and officially joined the Russell 2000 Small Cap Index by falling below their long term moving averages and into correction territory (defined as down 10% or more from a recent high) and a third straight calendar month of stock price declines is on the cards. The solid 4200-4500 range for the S&P 500 that had been in place since early summer has now broken to the downside, the index closed on Friday at 4117.

A perceived lack of political progress over the weekend overseas in the Middle East and domestically in Washington DC saw markets open on Monday in a depressed mood. The 10-year Treasury interest rate retreating a bit from a 16-year high of over 5% and oil prices ticking lower created a few twists and turns along the way but the S&P 500 still finished the day at its lowest level since May.

Tuesday was a much better day as investors began to get enthusiastic about the possibility of imminent blow-out big tech earnings and treasury yields stabilized - all of which helped prices move higher, particularly for the tech-heavy NASDAQ. After hours, Alphabet/Google disappointed but Microsoft beat expectations.

The Alphabet/Google earnings report, particularly the lower-than-expected revenue from its cloud business, continued to trouble markets on Wednesday, meaningfully dragging down all the indexes, but particularly the NASDAQ which had its worst day of 2023 so far and saw the impressive gains of the day before disappear instantly in a puff of smoke.

Wednesday was also the day that House Republicans finally agreed on the choice of a stolen 2020 election conspiracy theorist, January 6th insurrection apologist and a good buddy of “Team Burn It All Down” in Congress, Mike Johnson from Louisiana, as Speaker and second in line to the position of most powerful human being on the planet. The markets’ reaction was; yeah whatever, but now the real work begins - how are you going to avoid the US government being shut down on November 18th? Because right now we seem a million miles away from any resolution.

Before the market opened on Thursday, we learned that U.S. Gross Domestic Product (GDP) growth in Q3 accelerated to an astonishingly-high 4.9% annualized rate, more than double the Q2 pace, according to the latest estimate. More interest rate hikes in December or next year, anyone?

Meta/Facebook reported decent earnings but issued a note of caution on ad spending down the line that sent its shares tumbling and it was another stinker of a day with the nastiest aroma again wafting around tech stocks and the NASDAQ.

Tech rebounded somewhat out of the gate on Friday with positive reports from Amazon and Intel but then, alongside rapidly rising fears of a further expansion of military activity in Gaza along with word that US aircraft are bombing Syria, the latest Core Personal Consumption Expenditures (PCE) inflation reading was released ahead of the Fed interest rate meeting next week. It increased 0.3% in the last month and 3.7% year-over-year and consumer spending increased 0.7%, surpassing estimates of 0.5%. In other words, inflation is not going lower as hoped.

What did we learn last week? Well, the world of geopolitics looks grim, it’s not always entirely sunshine and roses in the Q3 earnings garden, interest rates in general and mortgage rates in particular keep on trucking upwards (see AVERAGE 30-YEAR FIXED RATE MORTGAGE below) and U.S. inflation seems stuck in the mud and is not going anywhere in a hurry.

And while none of these on their own are yet medium/longer term bearish game-changers, the fact that they are all happening at the same time means that no-one wants to seem like the optimist in the room right now. There’s also a nagging feeling that those quite incredible Q3 GDP numbers just can’t be right for some reason and will ultimately be revised down, maybe heavily.

When it comes to earnings, the problem is not that tech earnings have been outright bad. They haven’t been. But it’s an expectation problem. Tech firms are simply not producing the kind of growth that was universally assumed when artificial intelligence mania hit the markets in the spring and so we are seeing those AI-driven gains given back, entirely as you would expect when the strong bounce higher in stocks in May and June was mostly based on such overly optimistic growth assumptions. The relative failure of these assumptions to play out as hyped has become just another obstacle for markets to face going forward, along with the others I just listed.

Remember, though, that bull markets generally die when excitement reaches a fever pitch. When everyone is fully invested in stocks and there's nobody left to buy - that's when things turn properly south. Today, despite this year's double-digit percent rally in stocks, we're not even close to that kind of euphoria. That is the light at the end of the tunnel.

OTHER NEWS ..

Car Trouble .. Americans are falling behind on their car loans at the highest rate on record. The percentage of subprime auto borrowers at least 60 days past due rose to 6.11% in September, the highest level since Elton John asked us all (and a little lion cub) if we could feel the love that night in 1994. This rise in delinquencies is due to higher car prices and borrowing costs stemming from the Federal Reserve's interest-rate hikes. The resumption of student-loan payments and the expectation that higher interest rates will be maintained higher for longer have only exacerbated the worries that delinquencies will persist and grow.

Beware! Private Equity May Be Coming for Your Retirement Money .. It seems private equity firms are coming for your nest egg. Bloomberg reported that, among the roster of banks and brokerages helping private equity investment firm KKR raise money for some of its newest infrastructure investments, there are two names that stand out; Fidelity and Charles Schwab. Both are well-known for serving individuals, not the pension funds and endowments that typically invest in multibillion-dollar private and lightly-regulated investment partnerships such as KKR’s. But those sources of money are drying up.

Individual investors, by contrast, represent a deep reservoir of untapped riches, particularly in IRAs and retirement plans - administered in large part by the Fidelitys and Schwabs of this world.

UNDER THE HOOD ..

Weakness has now spread beyond the level of “a market pullback” that is likely to quickly recover ground. Instead, this level of technical damage apparent in key indicators is usually only resolved through the exhaustion of sellers, evidence of which is scarce right now.

As we can see from the new data point I will now be including in my weekly reports, the rapidly contracting PERCENT OF S&P 500 STOCKS TRADING ABOVE THEIR LONG TERM MOVING AVERAGE (LTMA, see below) and also the rapidly expanding Percent of Stocks Down More Than 20% From Their One Year Highs (whose 50%+ reading reveals that more than half of all U.S. stocks are now in classically-defined bear markets), conditions are becoming materially worse.

As in physics, market trends tend to persist until acted upon by an outside force. That force is Demand, and it has not yet made its return. Therefore, the overall market outlook remains technically troubled, although a possible short term oversold bounce next week cannot be ruled out.

Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.

THIS WEEK’S UPCOMING CALENDAR ..

A big week ahead.

Around 150 S&P 500 companies are scheduled to report earnings, including Apple, McDonalds, Conoco Phillips, Pfizer, Eli Lilly, Moderna, CVS, Caterpillar, AMD, Airbnb, Qualcom, Novo Nordisk, PayPal, Starbucks, Kraft Heinz, Anheuser-Busch, Simon Property Group, Dominion Energy, YUM Brands, DoorDash, Electronic Arts, and CBOE.

But the highlight of the week comes on Wednesday, when the Federal Reserve’s Open Market C…

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It started out so well. There was green all over the board for a while with earnings mostly looking very perky. But in the end, sentiment was overwhelmed by the noise of higher interest rates, Middle East fears, bedlam in Congress, a government shutdown once again looming on the horizon, fears that consumer spending - and thereby inflation - is refusing to die and some rather nasty projections about the global financial system.

Stocks began the week by jumping higher at the open on Monday and maintained their gains for the rest of the session, boosted both by a continued strong start to Q3 earnings season and by signs that cooler heads may be prevailing as Israel plots its next move and the apparent slight lessening of the risks of escalation into a regional conflict that directly includes Iran and other Arab states (and therefore likely to drag in the U.S. and other allies as well). It is this scenario that concerns the stock market, primarily because of the effects it could have on oil prices and the possibility of a resulting global recession.

Whatever you do, don’t stand between an American and a cash register. On Tuesday, we learned that Retail Sales in September, which was expected to rise by 0.3% month to month, more than doubled that rate of growth - soaring by 0.7% and both July and August’s numbers were revised higher. It continues to worry Wall Street that this orgy of spending could still push the Fed into an extra rate hike or two to dampen it down in the interests of dealing with inflation. Stocks hit the brakes, finishing the day fractionally lower.

Gloom swiftly descended on the markets on Wednesday as market interest rates soared again with 30 year fixed mortgage rates briefly touching 8% before retreating (SEE AVERAGE 30-YEAR FIXED RATE MORTGAGE below) and we finally saw a few earnings report disappointments, particularly from United Airlines (UA) and Morgan Stanley (MS). The body count kept rising in the Middle East and the oil price relentlessly followed suit and, as if we needed it, we got a reminder of how dysfunctional Congress is right now with the embarrassing chaos of the ultimately-doomed speakership bid of Jim Jordan.

Thursday wasn’t much better as remarks from Fed Chair Jerome Powell seemed to rule out an interest rate hike after the next meeting on November 1st (no big deal JP, we all kinda knew that already .. see FEDWATCH INTEREST RATE PREDICTION TOOL below) but failed to do so for anytime after that. He appeared to strengthen the “interest-rates-will-be-higher-for-longer” narrative. Stock markets were unimpressed and prices fell further since Fed rate policy is still the most critical driver of medium- and long-term stock and bond performance and Powell’s failure to confirm that it’s game over for rate hikes is a near-term negative.

The misery only further intensified on Friday when a Fed report warned of serious risks to the global financial system brought about by excessive asset valuations (including real estate), over-borrowing both by companies and individuals in the face of increased interest rates and over-leveraging by many financial institutions. Stocks fell for the fourth day in a row with the S&P 500 down a chunky 2.4% for a week that had started so well. The NASDAQ did even worse, losing 3.2%.

In the geopolitical sphere, "we're at the mercy of day-to-day news," according to Charles Schwab's renowned economist, Liz Ann Sonders. JP Morgan Chase CEO Jamie Dimon seemed to have become infected with a severe case of recency bias calling this "the most dangerous time the world has seen in decades," last weekend but the stock market was having none of it.

The so-called “fear gauge” measure of expected upcoming market risk and volatility, the CBOE Volatility Index known as the VIX (see LAST WEEK BY THE NUMBERS below), actually plunged about 11% on Monday, its largest one day drop in months although it drifted back higher as the week wore on and stock prices shifted back lower. It’s still about 75% below where it was in the early days of the pandemic, however.

For all the political and geopolitical noise that will occur in the coming days and weeks in the media, we need to watch oil prices because that is the primary way to measure the extent of the market’s worries about a regional conflict breaking out. If we start heading back towards and through the $100 a barrel level, that will indicate a higher degree of worry that could begin to directly impact stock prices.

This remains a noisy market and it’s being made even more so with the Middle East conflagration. While this noise is intensifying with the escalating geopolitical risks and sometimes contradictory data on inflation and growth, the bottom line is that the underlying factors that have fueled the rally in stocks since late May (and really all year) mostly remain in place for the time being.

But if market interest rates remain high then, while it probably guarantees no more hikes from the Fed, it absolutely does not prompt any rate cuts. And if market rates fall, then that all but guarantees no imminent Fed rate cuts.

Either way, things don’t look good for any interest rate cuts from the Fed any time soon and the problem is that markets have pretty much baked these cuts in to the current level of stock prices.

That is why stocks have been falling so effortlessly of late when it periodically hits home that interest rate cuts are not as imminent as assumed. This will likely to keep a lid on stock prices for a while until Powell decides to become more emphatic about a timeline for lowering rates and we may be waiting quite a while for that.

OTHER NEWS ..

It’s Back To Work We Go .. Work-from-home rates in the US have plunged to the lowest levels since the pandemic. Fewer than 26% of households still have someone working remotely at least one day a week, a sharp decline from the 37% peak. Only seven states, plus DC, now have a remote-work rate above 33%.

Rite Aid Band Aid .. Rite Aid has filed for bankruptcy. The nation’s third-largest pharmacy chain had been in trouble for a while, with rising debt plus legal fees and large settlements tied to the opioid epidemic. Rite Aid is doing the Chapter 11 version of bankruptcy, which means it will keep operating while it does some restructuring and will be closing some “underperforming” stores.

While Rite Aid does have some problems unique to its business, it’s been a rough year for retail pharmacies in general. which has included staff walkouts and a sharp rise in theft and even violence at CVS and Walgreens stores, with more and more products annoyingly but necessarily locked up behind plastic barriers in stores with shorter hours.

Good Show From Netflix .. Netflix is raising prices for some customers in the US, UK and France after posting its best quarter for subscriber growth in years, a sign of management’s confidence in the future even as rival streaming services lose money. The world’s top paid-streaming service said it added 8.76 million customers in Q3, far exceeding analysts’ forecasts and boosting its overall subscriber base to over 247 million. The company credited a strong programming slate and its crackdown on password sharing.

The company has returned to growth as many of its peers struggled to figure out their streaming operations. For example, Walt Disney Co., Warner Bros Discovery Inc. and Paramount Global have all cut costs and fired staff to improve their financial performance. Streaming companies have spent billions of dollars to fund new streaming services that can replace their declining linear TV networks. But most of them lose money.

Netflix had what was bizarrely (to me at least) the most-watched program on any streaming platform over the summer .. Suits, a series that first aired on USA Network and where we got our first glimpse of Meghan Markle years before she would reappear on Netflix in a rather different (!) role years later.

UNDER THE HOOD ..

The S&P 500 fell below its important 200-day moving…

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