@theMarket: Markets Consolidate Before the Fed
Traders are hoping for good news from the Federal Open Market Committee meeting on Nov. 2. Stocks have been rallying in anticipation, but the Fed has disappointed before. Will they do it again?
The bulls figure it this way: The economy is expected to weaken, at least moderately. However, the third quarter Gross Domestic Product (GDP) came in a bit better than expected rising 2.6 percent versus the 2.3 percent expected. So, there is no real proof that the bulls are right quite yet.
As for the slowing of inflation, there is little evidence of that as well. The Personal Consumption Expenditures Price Index (PCE) is a measure of prices that Americans pay for goods and services and is closely watched by the Fed. The PCE for September did come as expected, 0.5 percent. The University of Michigan Inflation Expectation index also rose in October.
Bond yields continue to gyrate and are held captive by every macroeconomic data point that is released. The dollar seems to be topping, at least in the short term. However, topping may not mean down, but just a period of moving sideways.
Nonetheless, the above combination of macro fundamentals is supporting stocks. The strength of the market has been even more remarkable given the earnings results of Google, Microsoft, Amazon, and Meta. Together these stocks comprise an enormous weighting in the overall market. Earnings results have been bad to terrible for these FANG stocks. Apple is the lone positive, beating analysts forecasted results. However, even Apple warned that the coming holiday season would not be great for the company.
Weeks ago, I explained to readers that this rally would be led by energy stocks, materials, precious metals, financials, utilities, and health care. For the markets to continue to hold their own (or move up), will depend on the strength of those segments of the market. I also advised, "don't expect markets to move straight up. Each economic data point will provide an excuse for traders to move markets up or down, but overall, the trend should be your friend." That has been the nature of this bear market rally.
Most strategists had been warning that this third-quarter earnings season would be a make-or-break event for the markets. I have ignored buzz kill predictions like that. As you know, I am cynical about the Wall Street quarterly earnings game. The way it works is that analysts cut their forecasts drastically in front of earnings, which then enables companies to "beat" these forecasts. Usually, a "beat" will see a company's stock price stock move up several percent or so.
The facts are that earnings, sales, and corporate guidance have not been stellar, despite the supposed "beats." More and more corporate managers are predicting a recession. Some have even given up providing guidance claiming that the environment is so uncertain that they cannot predict sales and profits with any certainty.
However, that is not what is moving markets in my opinion. It is the decline in the U.S. dollar and the recent pullback in bond yields that has done the yeoman's work, along with what I'll call "hopeification" that the Fed will turn less hawkish.
In recent days, we have seen the dollar decline on the back of intervention. The Japanese, Chinese, and British treasuries have been selling dollars. At the same time, the fear of recession has put a halt to rising yields in the bond market, at least in the short term.
What has not been a factor in the markets thus far is the mid-term elections, which are right around the corner. In past years, there was much more discussion, positioning, and predictions on what would happen to the markets and the economy depending on which party came out on top. I assume that neither party will have a meaningful impact on resolving the problems of the economy over the next two years, despite campaign promises.
I still think we continue higher with the S&P 500 Index reaching the 4,000-4,100 level in the days ahead. Of course, all bets are off if the Fed turns even more hawkish next week but I'm betting they won't be.