Are we in a Spooky Market?
Happy Halloween! I hope it has been more treats that tricks! This month we saw some very positive movement across the stock funds, only to see the gains erased at the end of the month. There continues to be euphoria about how well the stock market continues to perform despite signals to the contrary.
Inflation, while officially back to a very manageable level, still hasn’t been reduced across all goods, just the ones that are measured. Confounding analysts is the current and relatively low and steady price of crude. Since energy prices do not seem to be driving inflation other factors are at play. First, is the continued effect from quantitative easing and the expanded money supply (M1). Higher interest rates are designed to rein this in, but the interest rates were so low for so long, this cannot be quickly corrected. The second contributing factor is labor costs. The mandatory rise in minimum wage across many states, which would necessarily increase other wages, is also driving inflation. We are seeing airlines, who can use hedging to avoid fuel price variability, struggle with wage increases that directly impact their margins, and therefore, they must increase prices. We see the same in many daily, consumer driven and high labor industries from fast food to hotels.
We saw the Federal Reserve tackle the first issue with higher interest rates, only to drop them half a percentage point in September, signaling concern in the economy. Now, the whisper on the street is the jobs report coming out on November 1st will not be very positive. The speculation is it will be impacted by the Boeing strike and the hurricanes, but those issues will likely hide some of the issues the Federal Reserve is seeing in their data, since they are continuing to promote another interest rate cut soon.
In short, there is too much noise in the system to be sure how strong or weak our economy is, and the optimism in the stock market may be placed in the expected continued rate cuts by the Federal Reserve.
Lastly, we are in the midst of one of the most interesting and disruptive elections in our country’s history. Analysts who look at economic and stock market performance before and after an election have noted that the market tends to trend negatively when a new president, especially from a different party, is elected. There is no doubt the policies of the two candidates are radically different on taxes, tariffs, and government spending. I also think they are probably both different enough from the current administration to qualify as a potential disruptor in the short term, while investors try to understand the proposed policies and the impacts those policies will have on companies. For example, if the tax rates should suddenly fall, what would the companies do with the excess free cash flow? If tariffs are implemented, how quickly will their company grow and what will be the impact on international sales. These are not easy questions to answer and will take some time.
For the past two months, I have been in the bond funds, and I will continue to remain in the bond funds through November. It is an action I do not take lightly, and I have left some increased gains on the table, but it would be at a risk that is not commensurate with the expected return. One more month for me in the bond funds.
Keep investing!
