HBO documentary (airing Tues eve) claims to identify Satoshi. Still a "whipsaw" market but we expect investors to buy the dip, with 3Q24 EPS around the corner. Array ( [cookie] => 497ca9-d42738-478618-ff6811-de8b60 [current_usage] => 1 [max_usage] => 2 [current_usage_crypto] => 0 [max_usage_crypto] => 2 [lock] => [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 0 [reason] => Usage under limits [method] => ) 1 and can accesss 1

VIDEO: Be sure to tune into the HBO documentary Digital Money (airing Tues night at 9pm ET), where HBO claims to reveal the identity of Satoshi Nakamoto, creator of Bitcoin.  3Q24 earning season starts this Friday with JPM -0.21%  and so far its been solid.  Small-cap EPS set to grow +43% YoY, outpacing the 5% for S&P 500. (Duration: 5:42).

If you are feeling “whip-sawed” in October, that is understandable. Our message for this month is expect turbulence into election day but we expect investors to be buying the dips (because there is too much cash on the sidelines). This is consistent with the message from Mark Newton, Head of Technical Strategy, who is expecting equity markets (SPY -0.70% ) to make new highs this week. And that has been the case. There is still a lot of macro data to get through this week, so we expect markets to be reactive.

• Regarding Bitcoin, HBO is releasing a documentary Tues evening called “money electric” and claims they have uncovered the identity of Satoshi Nakamoto, the creator of Bitcoin BTC. This is airing at 9pm ET Tuesday.
• Sean Farrell, Head of Digital Assets Strategy, at Fundstrat, has a skeptical take:
  “We are doubtful that a journalist, after only a few months on the case, will uncover the truth behind a mystery that thousands of internet sleuths have been unable to solve for 15 years. There’s a slight upside risk if they identify someone who is deceased, as this would effectively ‘burn’ Satoshi’s supply for good. However, my base case is that they will likely point to someone still alive who was involved early on. Speculation will build, only to be debunked and forgotten.”
• I will be curious if there is any market reaction on crypto trading this evening. So I wanted to flag this for you.
• As for the broader markets, this is still a data heavy week. And the macro data from Wed to Friday are:
  – 10/9 Wed 7:00 AM ET: MBA Mortgage Applications
  – 10/9 Wed 2:00 PM ET: Sep FOMC Meeting Minutes 
  – 10/10 Thu 8:30 AM ET: Sep Core CPI MoM    0.26%e
  – 10/10 Thu 10:00 PM ET: Tesla TSLA -4.31%  Robotaxi Event
  – 10/11 Fri 7:00 AM ET: JP Morgan JPM -0.21%  3Q24 Earnings Release
  – 10/11 Fri 8:30 AM ET: Sep Core PPI MoM    0.18%e
  – 10/11 Fri 10:00 AM ET: Oct P U. Mich. 1yr Inf Exp    2.7%e
• Core CPI MoM of +0.26% is essentially the highest since April (it was +0.29% in Aug) and perhaps there may be some investors proclaiming inflation is surging again and the Fed made a policy error. We view such claims as an overly reactive market. Our analysis continues to point to inflation falling like a rock and the % of CPI components back to pre-pandemic levels is 55%, well above the 50% long-term avg (see chart below).
• JPMorgan will kick off earnings season, though 21 S&P 500 companies have already reported 3Q24 results. So far, it is decent with 76% beating and the YoY growth rate is 5%, with 9 of 11 sectors showing YoY gains. The declines are coming from commodity sensitive Energy and Basic Materials.
• Russell 2000 (small-caps) EPS growth 3Q24 is expected to be stronger at +43% YoY with the same drags from Energy and Materials. 3Q24 has not yet reflected any incremental lift from falling cost of capital or subsequent easing of financial conditions. So this is a good sign that small-cap earnings are growing faster than large-cap.
• As for volatility, the inversion of the VIX term structure is getting even more inverted. This measures the spread between future (4 months out) versus near-term (1 month). This inversion is steeper now than a week ago and two weeks ago. This shows markets see near-term volatility peaking around election day (11/5, 1 month out).
• And as long as volatility is high near-term, which contributes to the whipsaw of markets. But beyond election day, as VIX futures show lower expected future volatility, this is a reason supporting how markets likely go “risk on” after election day. This would support a rally post election.
• But as we advised, we are not outright bearish near-term, but we are acknowledging the headwinds. But with so much cash on the sidelines, we expect these dips to be bought.
• And more importantly, the 3 tailwinds into year-end are even bigger and more durable than the headwinds. And that is why we think investors will buy this dip, like they did in all of 2024.
  – Fed launches easing cycle + “no landing”
  – China PBOC “bazooka” = positive inflection
  – Post-election and cash on sidelines dynamics
• The main thing to remember is when the Fed cut and the US economy is not in recession (like today):
  – S&P 500 up 3M later 7 of 7 times
  – S&P 500 up 6M later 7 of 7 times
  – this is bullish
• Regarding China, our take is to “respect the breakout” as Mark Newton, Head of Technical Strategy, flagged early last week that FXI 0.16%  has broken a multi-year downtrend. Given the “bazooka” level policy measures taken by the China central bank, we believe the risk/reward has now shifted favorably for investors.
• As we highlight below, China has massively underperformed the US on a 3-yr and 10-yr basis. Thus, there is a lot of room for upside if these new measures gain traction:
  – 3-yr underperformance -34% (was worse)
  – 10-yr underperformance -77%
• The cash on the sidelines continues to grow. Total money market balances surged to $6.4T last week, up a near record $130 billion. This balance was $4.2T when the Fed began its “war on inflation” and we continue to see this as a source of firepower. Hence, constructive.
• And to repeat, margin debt has not even risen in the last 4 months and basically flat at $797 billion. Keep in mind this figure was $936 billion in Oct 2021. So there is a lot of room for investors to employ margin debt.
• Finally, this all favors small-caps versus large into year-end. We have written about it exhaustively, so please review our past notes. But the China rally similarly benefits small-caps mainly as this is evidence of risk on. And our data shows the Russell 2000 IWM -0.71%  correlation to FXI 0.16%  is second only to Consumer Discretionary.

BOTTOM LINE: Expect investors to buy this dip

We ultimately expect investors to buy this dip. Keep in mind, the positive tailwinds for stocks (above) are very strong:

• since 1950, when S&P 500 is up >10% in the first half
• The second half average gain is 9.8%
• The win ratio is 83% and the only down years were during the years when Paul Volcker was Fed chair
• This implies S&P 500 reaching 6,000 by the end of 2024

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Key incoming data October:

• 10/1 9:45 AM ET: Sep F S&P Global Manufacturing PMI Tame
• 10/1 10:00 AM ET: Sep ISM Manufacturing PMI Tame
• 10/1 10:00 AM ET: Aug JOLTS Job Openings Tame
• 10/3 9:45 AM ET: Sep F S&P Global Services PMI Tame
• 10/3 10:00 AM ET: Sep ISM Services PMI Mixed
• 10/3 10:00 AM ET: Aug F Durable Goods Orders Tame
• 10/4 8:30 AM ET: Sep Non-Farm Payrolls Hot
• 10/7 9:00 AM ET: Aug F Manheim Used Vehicle Index Tame
• 10/8 6:00 AM ET: Sep Small Business Optimism Survey Tame
• 10/8 8:30 AM ET: Aug Trade Balance Tame
• 10/9 2:00 PM ET: Sep 18 FOMC Meeting Minutes
• 10/10 8:30 AM ET: Sep CPI
• 10/11 8:30 AM ET: Sep PPI
• 10/11 10:00 AM ET: Oct P U. Mich. Sentiment and Inflation Expectation
• 10/14 11:00 AM ET: Sep NY Fed 1yr Inf Exp
• 10/15 8:30 AM ET: Oct Empire Manufacturing Survey
• 10/17 8:30 AM ET: Sep Retail Sales Data
• 10/17 8:30 AM ET: Oct Philly Fed Business Outlook
• 10/17 9:00 AM ET: Sep M Manheim Used Vehicle Index
• 10/17 10:00 AM ET: Oct NAHB Housing Market Index
• 10/17 4:00 PM ET: Aug Net TIC Flows
• 10/23 10:00 AM ET: Sep Existing Home Sales
• 10/23 2:00 PM ET: Oct Fed Releases Beige Book
• 10/24 8:30 AM ET: Sep Chicago Fed Nat Activity Index
• 10/24 9:45 AM ET: Oct P S&P Global Manufacturing PMI
• 10/24 9:45 AM ET: Oct P S&P Global Services PMI
• 10/24 10:00 AM ET: Sep New Home Sales
• 10/25 10:00 AM ET: Oct F U. Mich. Sentiment and Inflation Expectation
• 10/25 10:00 AM ET: Aug F Durable Goods Orders
• 10/28 10:30 AM ET: Oct Dallas Fed Manuf. Activity Survey
• 10/29 9:00 AM ET: Aug S&P CoreLogic CS home price
• 10/29 10:00 AM ET: Oct Conference Board Consumer Confidence
• 10/29 10:00 AM ET: Sep JOLTS Job Openings
• 10/30 8:30 AM ET: 3Q A 2024 GDP
• 10/30 10:00 AM ET: 3Q24 Treasury Quarterly Refunding Press Conference
• 10/31 8:30 AM ET: Sep PCE Deflator
• 10/31 8:30 AM ET: 3Q Employment Cost Index

Economic Data Performance Tracker 2024:

Economic Data Performance Tracker 2023: