Pendulum Moving Back On Interest Rates

The markets tried to hold on to their winning streak yesterday, but only the Nasdaq closed in the green, barely. Profit taking and selling into the close weighed on the Dow and the S&P 500, but it was orderly. 

Communication Services was the best performing sector due in large part to Alphabet’s (GOOG) earnings results, followed by Consumer Discretionary, helped by Amazon (AMZN) and Telsa (TSLA). Microsoft (MSFT) also had a great day on the back of its earnings, up 4.2%, but it was not enough to get Technology into the green.  

Energy was the worst performing sector, as a build in inventory pressured oil. WTI is down over 1% this morning.

Financials were hit as yields came down on the 10-year to 1.53%. The two-year yield however did gain a bit of traction, suggesting a Fed rate high to stem inflation may happen sooner than forecasted.  

More and more, the street is looking for the Federal Reserve to hike rates next year. It wasn’t long ago when conventional wisdom said the Fed wouldn’t hike rates until 2024. Now, the pendulum is moving fast towards two rate hikes next year, and many more in 2024. We do not believe this will play out, partly due to all the government debt.

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Breadth was decidedly negative, as was the down volume, but there were more new 52 week highs on the NYSE.

Investor sentiment declined a bit, yet there is still more bullish sentiment that bearish. Interestingly, in the last two quarters, sentiment fell in the third week of earnings. We are not in the camp that thinks individual investor sentiment is contrarian. When the street is bearish, or sheepish, the next move tends to lead to upgrades. 

To see the chart, click here.

We have been writing for weeks about the seasonality of the market, which stumbles in September, but it turns in October.  Thus far, its sticking to the script with the S&P 500 +4.5%, the Nasdaq +2.6%, and the Dow +2% for the month.  

Portfolio Approach

We are adding a new position in Industrial this morning to our Hotline Model Portfolio.

Today’s Session

Ford (F) is zooming higher this morning after beating on the top and bottom line. EPS of $0.51 was almost double the estimate. The company upped its guidance for the year again and is reinstating its dividend in the 4^th quarter.

On the economic front, initial jobless claims fell to 281,000 for the week ending October 23, a 19-month low, but was still above the pre-pandemic level of 212,000.

To see the chart, click here.

Third quarter GDP grew 2%, but it fell short of the 2.7% estimate, and was down significantly from 6.7% in the second quarter. The decline was led by a slowdown in consumer spending as rise in Covid-19 cases resulted in new restrictions and delays in re-openings in parts of the country. Government assistance payments such as forgivable loans to businesses, grants to state and local governments, and stimulus to households decreased.

Personal consumption expenditures, private inventory investment, nonresidential fixed investment and state and local government spending increases were partly offset by the decline in exports, federal government spending, and residential fixed investment. 

Despite the disappointing GDP results, the markets are higher.