"It’s not the note you play that’s the wrong note – it’s the note you play afterwards that makes it right or wrong." ― Miles Davis

Good evening, 

Investors have been nervous and uncertain in the past two weeks. At our weekly research huddle, Fundstrat Head of Data Science Ken Xuan suggested that this was an indirect result of the federal government shutdown, which has largely cut off the flow of macroeconomic data. "As time goes by, the more time we go, the more uncertainty we feel. That's because we just don't have data to know where we are," he said.

It could be argued that Friday morning's release of September CPI data removed much of that uncertainty, though it must have helped that the numbers came in dovish – lower than consensus expectations. That bolstered expectations of another rate cut when the Federal Open Market Committee meets next Wednesday, and the results could be seen in a range of indices – the S&P 500, the Nasdaq Composite, and the DJIA, as well as the small-cap Russell 2000. All four posted positive weeks, with the Russell 2000 leading the way with a 2.50% weekly gain.

Yet not all of the choppiness from the past two weeks has been due to the lack of fresh data. Fundstrat's Head of Research Tom Lee attributes much of the rangebound action to a sort of dual PTSD (post-traumatic stress disorder). U.S.-China trade tensions remained elevated this week as the U.S. threatened to ban exports to China of any products that contain or were made with U.S. software. As Lee suggested, this gave investors "PTSD from earlier this year" when the trade war began.  

Recent worries about the state of the U.S. credit market also triggered PTSD of a different sort. In the wake of the Tricolor and First Brands collapses as well as losses by lenders like Western Alliance and Zions Bank, some began having flashbacks to the 2008 global financial crisis (GFC). As Bank of England Governor Andrew Bailey told MPs, "If you were involved [as a regulator] before the [GFC] and during it," recent events were setting off "alarm bells." 

Lee remains largely unworried on that front. As he highlighted again this week, "if there are credit problems brewing, we should see it in high-yield spreads, but it's hardly budged."

Lee reminded us that "before the market topped in 2007, high-yield spreads were just under 300 bps, just about where they are today. On Nov. 21, 2007, about a month after the market topped, spreads doubled to 600." 

To Lee, that rapid doubling in the high-yield spread back in 2007 "was a warning sign," so those worried about a possible GFC redux might wish to keep an eye out for a similar doubling re-emerging.

This is illustrated in our Chart of the Week:

The high-yield spread is something Head of Technical Strategy Mark Newton is also watching. "A breakout," if it occurs, "could be negative for risk assets," he warned. 

For now, he remains constructive. Asked to comment on the press speculation that we are currently in a market or AI bubble, Newton said, "I've heard the term 'bubble' so much in the last couple weeks, and it's a very action-oriented word that makes us all pay attention. But honestly, technical trends haven't really given us any reason to be concerned."

The same goes for recent choppiness in markets. "I don't care if the market's been sort of choppy and range-bound. In my view, despite the choppy short-term trends, longer-term trends are intact. And with sentiment remaining subdued, it seems to me that the path of least resistance remains to the upside over the next couple weeks."

What about valuations, Newton was asked during our weekly research huddle. "Yes, everybody's saying things are expensive. Well, compared to what? How do we know how to value AI?" he asked rhetorically. For him, metrics like the number of stocks near 12-month highs matters more. It could be bearish, he suggested, "if that percentage starts to roll over sharply," but as of right now, it isn't.

Lee concurs. The case for a rate cut from the FOMC arguably strengthened this week, and the confirmation that President Trump and China's Xi Jinping will meet next week on Thursday alleviates yet another concern that has been bothering markets. Thus, Lee continues to view any dips that might emerge as buyable. 

Elsewhere

The U.S. and Australia signed a tentative deal for joint ventures into various rare earths and critical minerals, hoping to weaken China's chokehold on the materials. The agreement apparently calls for $3 billion in investments from the longtime allies in projects to shore up U.S. supplies of such materials. It's unclear the shape that deal will ultimately take, however, with Australian Prime Minister Anthony Albanese at pains to point out that the deal "does not constitute or create any legally binding or enforceable obligations, express or implied."

Citi elected chief executive Jane Fraser to serve as the bank's chair as well, with current chair John Dugan to transition into a role as lead independent director. Not since Charles Prince stepped down in November 2007 has a single person occupied both positions at Citi.

Former French President Nicolas Sarkozy began serving his five-year prison sentence for campaign-finance violations, even as his appeal proceeds. The decision to imprison the former head of state even before his appeal is heard has further divided the already polarized political landscape in France.

Google announced a major technical leap in quantum computing that could enable some types of calculations to be done more than 13,000 times faster than a traditional supercomputer. Dr. Michel Devoret, who is already having a great year after co-winning this year's Nobel Prize in Physics, announced the achievement on behalf of his team at Google, working with researchers at Yale, Berkeley, and UCLA. The experts successfully ran a new algorithm, which has potential applications in drug discovery and advanced materials research, at speeds that far exceed those of similar algorithms run on the fastest traditional supercomputers.

ADP, the payroll processing services provider, has stopped providing its data sets to the Federal Reserve, for reasons that are unclear to the public. The Fed had been using an anonymized, aggregate version of the company's data to help inform its policy decisions, but the company recently opted to stop doing so, despite Fed Chair Jerome Powell's attempts to persuade them otherwise. 

President Trump pardoned Changpeng "CZ" Zhao, the founder of the Binance cryptocurrency exchange. CZ had been convicted for violations of anti money-laundering (AML) laws. His pardon has sparked criticism due to the close business ties between Binance and the Trump-backed World Liberty Financial, as well as Binance's role in creating and launching Trump's USD1 stablecoin and thus significantly boosting his personal wealth.

High-profile NBA personnel including Portland Trail Blazers head coach Chauncey Billups were charged for their alleged participation in two separate gambling-related schemes. In one, players allegedly participated in the sports-betting equivalent of insider trading, providing non-public information to give conspirators an edge in betting. Prosecutors cited the example of then-Charlotte Hornets point guard Terry Rozier, who allegedly faked a foot injury and exited the game early during a March 2023 matchup against the New Orleans Pelicans, thus enabling his forewarned co-conspirators to correctly bet on him scoring few points that night. A second scheme involved allegedly rigged poker games in which well-known NBA personalities knowingly ensnared victims attracted by the chance to play against famous athletes.

And finally: Iceland has a group of new, but unwelcome, residents. For the first time, mosquitoes have been found in a country that had previously been too cold for the annoying pests to inhabit. (Yes, we know mosquitoes play an important role in ecosystems, but that frankly doesn't make them any less annoying.) Climate change has impacted Iceland to a disproportionate amount, with rapid glacier melting changing ecosystems and even increasing volcanic and seismic activity.