“Read all the time. Don’t just do it because you’re curious about something, read actively.” ~ Byron Wien (1933-2023)

Good evening,

Fundstrat’s Head of Research Tom Lee opened this week’s internal research huddle with a blunt assessment. “The markets were just bleeding every day,” he acknowledged. In his view, some of this had to do with tax-loss harvesting on the part of mutual funds, which mostly end their tax years on October 31. 

“There are all these funds that have incurred huge losses,” he observed, and they’re selling now for tax purposes – to use those losses to offset gains. “This includes bond funds – and this might be the first time they’ve had to do this, because you almost never have losses on bonds,” Lee noted. In his view, “this selling is bleeding into stocks getting pressured, too.” Yet he sees signs that exhaustion is beginning to set in. 

“I'm hopeful of that,” responded Mark Newton, Head of Technical Strategy. “I think that probably is going to be necessary before we can call a true low.” However, Newton doesn’t believe such a low is imminent. “When I look at things like the put-call ratio or traditional sentiment gauges like Investors Intelligence or AAII, most of those have been starting to get more negative in the last couple of days. With the put-call, we're getting close – but we’re still not at bearish levels that we hit back in May or last October,” when the market hit previous lows. 

He continued, “We're likely close. We've now had a negative August and a negative September, and October has gone counter to expectations. And a lot of that's based on interest rates.

Lee suggested that the tax-loss harvesting by bond funds might be helping to push rates higher. And while Newton didn’t disagree, he also proposed that “deficit spending is causing a great amount of supply to be dumped on the market, and that’s likely going to continue over the next year. I think that's a problem for Treasuries.”

Yet both agree that the inverse correlation between rates and equities appears to be weakening. Both of them have previously made this observation, and this week, Newton said he continues to see this happening. “We've seen some divergence in the correlation between Treasuries and equities,” he said, “so if rates continue to go up, especially at a slower rate, then I don't think equities need to go down or be spooked as much; rates are not as much of a factor now as they were a month ago.”

This could be good for equity investors, because, in Newton’s view, “rates are a work in progress. They have been actually sort of sputtering along the top, but they haven’t hit a strict new high. I think we're going to seek out between [5.10% and 5.25%] between now and next month. I don't think it happens right away.”

On the macroeconomic front this week, we saw PMI readings that, in Lee’s view, suggest that “underlying economic momentum is recovering towards expansion.” As he has observed in the past, “the group that is the most positively levered to rising PMIs remain US Industrials (XLI), so this week’s PMI release supports an overweight stance.”

He further notes that Industrials CDS (credit default swaps) are outperforming the broader market, suggesting that on a relative basis, credit investors see risks decreasing for Industrials. As Lee points out, and as our Chart of the Week shows, “Industrials CDS moves tend to lead Industrial equities by 90 days. Thus, this suggests that we should see relatively improving performance soon.”

For those more technically inclined, it is worth noting that Newton also views Industrials favorably. “I expect to see rates roll over next month, and that should fuel Industrials, and it should fuel Tech,” he said.

Elsewhere 

The European Central Bank paused its rate hikes for the first time in 15 months. By unanimous vote, all the ECB Governing Council members voted to keep the benchmark interest rate at its record-high 4%.

The United Autoworkers (UAW) and Ford reached a tentative agreement on Wednesday, per which workers over the next 4 1/2 years would receive a 25% raise over and above any cost-of-living increases. Meanwhile, this week, the UAW expanded its strike against Stellantis, ordering 6,800 employees at the company’s Dodge Ram plant north of Detroit to walk off the job. It also ordered 5,000 members at GM’s SUV plant in Texas to do the same. 

General Motors withdrew its 2023 earnings guidance due to uncertainty surrounding the UAW strike, company executives said during its 3Q earnings call. GM had raised its full-year profit guidance in July, but estimates that the strike has already cost the company $800 million. As publication time approached, news outlets were reporting rumors that the UAW was close to reaching a tentative agreement with GM and Stellantis.

The UK’s Home Office is putting together a special police force to combat the increasingly prevalent problem of organized-crime groups running shoplifting rings. Major US retail chains have fallen victim to the same phenomenon, which has become serious enough to show up in quarterly earnings reports.

The women of Iceland went on a one-day strike on Tuesday, suspending work in a protest targeting gender pay inequality and violence against women. Among the women participating was Prime Minister Katrin Jakobsdóttir. The World Economic Forum has rated Iceland as the most gender-equal country in the world for 14 consecutive years. 

Chinese authorities have begun multiple investigations into Foxconn, best known as the manufacturer of iPhones. Government-linked news outlets report that the company is suspected of unspecified tax and land-use violations, while others suspect the regulatory action has more to do with remarks about China that the company’s founder, Terry Gou, has made as he runs for Taiwan’s presidency. 

And finally: Former Chinese Premier Li Keqiang died this week at age 68. A trained economist, Li was a strong advocate for free-market reforms and debt reduction. His resignation in March 2023 was widely seen as the result of President Xi Jinping’s pursuit of ever-greater political power.