“It is always from a minority acting in ways different from what the majority would prescribe that the majority, in the end learns to do better.”- Fredrich August von Hayek

Open-mindedness and a willingness to learn are crucial to sustained investing success. Many investors may ignore content that differs from their preferred thesis or conclusions. If you’re doing this, we urge you to stop. You should look at the viewpoints of those on the other side of your investment thesis as one of your most exalted sources of information. It is where you can find the cracks in your argument, and it is where you can improve and refine your own understanding.

Our various research heads look at markets through different lenses. Sometimes these views converge, like during the great turkey shoot of markets in 2021, and everyone on the team agrees on the general direction of markets. However, even in these cases, there’s always nuance and difference in how our diverse Wall Street research team looks at the market. There’s an unprecedented level of uncertainty now from a mounting list of risks, and it’s tough to make heads or tails of what will happen in the future at any time, but even more so during periods of tumult and upheaval.

Some of our research heads have different viewpoints. We view this as a decided strength that many other research providers may lack. Participating in groupthink is how you can really get slammed in this game. Still, some folks selling research might prefer the ease of message to the integrity of the process. They may want to distill a superficial and easy-to-follow message to you. This is not our intent. We dive deep into the data to find nuanced conclusions. We want you to think, learn, and develop a firm grasp of the skills and concepts needed to succeed in investing for the long term. In short, we’re not just giving you fish; we’re teaching you to fish.

The ultimate masters of Wall Street and the entire wealth management industry are the almighty ask and the boisterous bid. Markets, at their very core, are all about conflicting viewpoints. For whatever reason, a buyer thinks it’s a good time to buy an asset, and a seller thinks it’s a good time to sell one. The price itself is such a powerful indicator because it is the sum of all these decisions, the best and the worst, and everything in between.

This morning was a classic case of good news being bad news. The unemployment rate dropped to 3.5% unexpectedly, leading to turbulent markets earlier in the day. The median estimate of economists was 3.7%. This reading is the lowest headline unemployment rate in the United States since 1969. This is a problem because, as our Head of Research, Tom Lee, points out, the Fed is looking for progress in three areas before they may make an about-face on inflation:

• Slowing GDP Growth
• Softening Labor Demand
• Significant Progress on Inflation

While the JOLTS data showed encouraging progress, the headline numbers from today still show continued strength. Under the hood of the report, hiring was most robust in leisure, hospitality, and health care. This was the final piece of jobs data the Fed will have to consider before their policy meeting on November 1-2. While they still have an important CPI number to consider next week, this jobs surprise makes a fourth sequential 75-bps hike all the more likely.

Average hourly earnings were up 0.3% from August and 5% YoY. This was a deceleration but is still higher than the Fed would like to see. The labor market remains strong, but evidence of a wage-price spiral isn’t definitive. The underemployment rate, which measures workers that are only loosely attached to the labor force, fell to match the lowest recording on record. This still suggests an imbalance in the supply and demand of workers that the JOLTS data just showed to be alleviating. The hard data and soft data are diverging.

US equity markets reached their most significant proportion of global equity market cap on record. Amazingly, US equities account for over 60% of all equity value worldwide. The closest competitor is Japan, at only a little over 5%. US assets continue to be a safe haven as financial conditions around the world tighten. The dollar and yields retreated earlier in the week, but both went back up as we shifted to risk-off after this morning’s report. The 10-year crept back up toward 4%, settling just under 3.9%

Semiconductor stocks were among those which led the rally earlier in the week as a powerful risk-on sentiment pervaded after a brutal September. That abruptly reversed after AMD issued disappointing forward guidance on weakening PC demand Thursday after the close. The highflier closed down nearly 14% on Friday. Microsoft had warned of weakening PC demand earlier in the summer, and it appears to have been prescient. AMD has been a solid stock over the past few years, executing well and gaining market share. Some are concerned it could be a bellwether for broader problems on the demand side for certain areas of Technology. US Chipmakers were also hit by the Biden administration’s announcement Friday specifying new export bans to China for certain chips which the Chinese military might use. AMD’s report shook the entire technology sector, and the Nasdaq closed down nearly 4%.

Asian and European semi-stocks also had their nascent rallies reversed. Samsung’s weak guidance is perhaps even more concerning because it is so massive and sells so many chips across the global economy. AMD’s weakness was more about PC demand, whereas Samsung’s guidance is a negative harbinger of weak global consumer demand. The firm has cut its guidance for second-half chip sales by nearly a third since it provided its April forecast, illustrating how quickly fortunes have turned for the most cyclical part of Technology. Our Head of Global Portfolio Strategy, Brian Rauscher, has urged folks to stay out of the cyclical areas, including semiconductors, because their earnings expectations are still far too high based on his model. He said the “confession” pre-earnings season would see some high-profile warnings. Warnings from other companies across the economy have been mounting.

We know it has been tough sledding, friends. We are seeing some strong evidence in the soft data that inflation should come down faster than the consensus thinks, which paves the way for a more gingerly path to tightening than September’s dot plot would suggest. Futures have already begun reflecting such a path. The JOLTS data is encouraging, and if it falls as fast as it did over this last report, openings could be closer to the levels the FOMC would like to see by November. Housing formation is negative, and apartment demand is now negative, so shelter, the biggest CPI driver, should be on its way to reversing. Also, high-yield debt is showing relative strength.

So, extreme bearish sentiment and some divergences suggest the clouds could be clearing sooner than expected. There is also pressure on both margins and revenues, which means earnings will likely be a drag on stocks. More will be revealed, and our team will be giving you well-informed insights from multiple vantage points to help you triangulate the best course of action for your investments. Please be sure to check Mark Newton's new stock list, Upticks!