“There is no such thing as perfection, there are only standards. And after you have set a standard you learn that it was not high enough. You want to surpass it.” ~Jascha Heifetz

Good evening:

Fundstrat Head of Research Tom Lee noted last week that he saw signs of “equity seller exhaustion,” while Head of Technical Strategy Mark Newton reminded us that October is known as a “bear-killer month.” The resilience displayed by markets for most of this week is consistent with this assertion. 

When markets opened this week, the tragic news from Israel had all of us horrified – and investors uncertain. Yet the major stock indices rose on Monday, prompting Lee to observe at the time that “the stock market reaction is telling us investors view the conflict as ultimately limited in time and scope. If there was a bigger selloff, I’d think that would tell us that the market was smelling something much more dangerous and engulfing.”

Strictly from a technical analyst’s standpoint, Head of Technical Strategy Mark Newton suggested during our weekly huddle that, rather than trying to determine the impact of recent tragic events on the market, “it's almost always wise [from an investor’s perspective] to really just concentrate on what the stock market itself is telling us.” What the market is telling him is that “there's a very good likelihood [it] has bottomed, which makes sense from a seasonal perspective – if not to those who are looking around the globe trying to make sense of what's happening.”

“We had two really awful months in August and September, and once we pulled into the traditional bear-killer month of October, we probably reversed in the first week. We have already returned back up above former August lows,” he pointed out. However, Newton’s constructive view is not solely based on seasonality.

“We have seen a pretty decent expansion of breadth and volume,” he said, explaining, “historically, it was just Technology that had been leading the charge and now we see all these different sectors that have come about to sort of join and actually help to broaden the market out, which I think is very encouraging.” He added, "We see the 10-day average of advances versus declines has gone back above the zero line, which is normally a very good thing for markets. Another measure of breadth, the bullish percent index, had gotten down under 30 – but now we're up above 30. This is also generally a good sign for risk assets.”

The week saw the release of key macro data – including the CPI and PPI numbers. Although CPI came in ever-so-slightly higher than expected, our data team drilled down and discovered that the bulk of this came from unexpectedly high “lodging away from home” numbers – hotel stays. This component rose 4.21% MoM – a 51% annualized rate.

This is seen in our Chart of the Week:

Looking even deeper, we realized that much of this could be attributed to hotel prices in New York City. The reason for this was unclear, though there was some speculation that a new city rule that took effect on September 5 drove up demand for hotel rooms by severely restricting the supply of short-term rentals such as Airbnbs.

As Lee noted, outside of the hotel-related component, “the rest of the CPI report was in line, so we generally view this as [...] not warranting any major changes in terms of Fed reaction function or equity markets.” He added, “If someone thinks the Fed needs to keep raising Fed funds to slow hotel prices, this just seems off-base.” 

Since the beginning of October, we have seen a number of FOMC members making dovish comments and suggesting that the recent rise in long-term yields would tighten financial conditions enough to negate the need for additional hikes. Notably, Atlanta Federal Reserve President Raphael Bostic said this week, “I think our policy rate is at a sufficiently restrictive position to get inflation down to 2% [...] I actually don’t think we need to increase rates any more,” while Philadelphia's Patrick Harker said on Friday that, “absent a stark turn in what I see in the data and hear from contacts [...] I believe that we are at the point where we can hold rates where they are.”

For Lee, the key variable to watch is interest rates. “We still expect longer-term yields to adjust lower,” he told us this week, “and 10-year yields falling remains the key to supporting higher equity prices near-term.”

Newton sees that beginning to happen. “We got up to near 4.90% and everybody thought we were going above 5%,” he said. “All of a sudden, earlier this week, we had a huge pullback to almost 4.50% very very quickly. On a bigger scale, this is sort of a drop in the bucket compared to the longer-term trends. But my thinking is that we have reached exhaustion and a lot of my work suggests that yields are starting to pull back and will fall over the next 12 months.”

“Do you think it gets below the breakout?” one team member asked.

“Not right away, but yes. That’s probably a 2024 event. But I think between now and the end of December, maybe even as soon as the end of October, I think we certainly can pull back and test for 4.40%. That's only about 20 basis points lower.”

“So I think October is going to be a good market for risk assets. Over the next few weeks, even if we pull back to a minor extent, I still think the market is going to be good.”

Even though the S&P 500 closed up for the week, it fell on Friday. Lee interpreted that as understandable, with escalating tensions in Israel pushing investors to risk off. But because “consensus is scared and bearish at a time when technicals are turning positive,” he argued, “it might be best to countertrade that fear.”

Elsewhere 

The European Union is investigating social media companies over their handling of hate speech, violent/terrorist content, and misinformation on their platforms in response to the Hamas attacks on Israel. X (Twitter), Meta, and TikTok have all been warned by the EC Commissioner for Internal Market Thierry Breton for not doing enough to remove such content, as required under the Digital Services Act. 

The International Monetary Fund (IMF) lowered its 2024 global growth forecast from 3.0% to 2.9%, citing the continued impact from higher interest rates and the Ukraine war, and new uncertainty from the Hamas invasion of Israel. The IMF also raised its 2024 global inflation-rate forecast from 5.2% to 5.8% – though this would still represent a significant decline from 2022’s 8.7% global inflation rate. 

In labor news, the UAW expanded its strike at Ford, with 8,700 workers walking out of the company’s pickup-truck plant in Kentucky. General Motors was hit with fresh labor problems as 4,300 workers at three of its Canadian plants went on strike, seeking to force GM to match the offer the Unifor National union got for its members at Ford. In entertainment, the Screen Actors Guild announced that negotiations had become unproductive and suspended talks with Hollywood studios. On a more positive note, healthcare workers at Kaiser Permanente have reached a tentative agreement, thus ending what was the largest healthcare strike in US history.

Ireland announced plans for a sovereign wealth fund to be seeded with EUR 4 billion (USD $4.2 billion) from a budget surplus generated by unexpectedly high corporate-tax revenues. The Future Ireland Fund would then be funded with 0.8% of the country’s GDP every year from 2024 to 2035. Officials said returns generated by the fund would help the government fund anticipated growth in costs related to its aging society, including for pensions and health care.

Senate Majority Leader Chuck Schumer (D-New York) and a bipartisan delegation of six Senators visited Beijing early in the week and met with China’s Xi Jinping, possibly as a prelude to a meeting between Xi and President Biden later this year. The senators had planned visits to South Korea and Japan this week but returned home in response to the terrorist attacks in Israel.

Claudia Goldin has won the 2023 Nobel Memorial Prize in Economic Sciences for her research on female employment, particularly employment trends involving married women. Dr. Goldin is a professor at Harvard and earned her PhD at the University of Chicago.

The U.S. has awarded Samsung Electronics and SK Hynix with indefinite waivers on the import of sensitive semiconductor-manufacturing equipment into China, allowing the companies to supply their respective factories in China as needed without applying for permission each time. 

Despite hopes that China’s Golden Week eight-day holiday period would stimulate its troubling domestic consumption levels, the country’s September CPI came in at flat YoY, below estimates of 0.2%, while PPI was down 2.5% YoY – a bigger decline than the expected 2.4%. The latest numbers exacerbate fears that China will slip into deflation. The weaker numbers were attributed to a decline in food prices relative to their high levels last year.