CWG Investment Committee: Market In Transition

%POST_TITLE% Thumbnail

October was the third down month in a row for stocks. Both the S&P 500 and Nasdaq dropped more than 10% from their recent July highs, which in Wall Street parlance that spells a market “correction”.

The bond market also saw prices retreat as rates on the 10-year US Treasury and 30-year US Treasury bonds both rose over 30 basis points, each hitting the 5% mark in October.

The rise in yields was caused by investors realizing the Fed will maintain higher rates further into 2024. Higher rates generally hurt consumers. Mortgages hit 8%.

Investor sentiment peaked at 50.3% bears on November 1st with only 24.3% bulls, according to AAII.

The “Magnificent 7” growth stocks are over 80% of all S&P 500 gains. The equal weighted S&P 500 is down on the year along with the Russell 2000.

Gold is +7% YTD, as the world worries about a hot war in the Middle East, plus inflation, which remains untamed around 4%.

Charmain Powell says the Fed has not yet completed its mission to return the US inflation rate to 2%. The economy printed 4.9 % GDP in the last quarter, confounding most economists. Industrial contraction seems to be at hand while consumer and government spending remain elevated. The latest PMI was 46.70, down from 49.00, indicating a manufacturing recession.

History provides little in the way of guideposts as to what happens after a huge increase in money printing by the Fed, combined with fiscal deficit spending by the government, except that inflation becomes imbedded in the economy.

In the 1970's we had what was called a Guns & Butter economy given the Vietnam War and huge spending programs. Inflation soared and growth slowed as America appeared weak and the US dollar lost a great deal of its value once we went off the gold standard in 1971.

We are running a near $2 trillion-dollar fiscal deficit now and have over $33 trillion in government debt. Interest payments for the government are rising rapidly as are issuance of US Treasury notes and bonds to finance this record debt. Interest costs are approaching $800 billion, roughly the same as is spent on our defense budget.

As social spending on Medicare, Medicaid, Social Security, and Welfare are sacrosanct, what can a politician do but spend more and hope for the best?

According to legendary investor Stan Druckenmiller, this environment leads to government spending crowding out business and venture capital spending which ultimately hurts productivity. Some optimists believe those worries will be solved by AI, hence the outperformance of the tech giants. They grow in all environments, have large cash hordes earning 5%, and have great margins.

Now that most investors have grown gloomy, we have entered two of the best performing months in a typical year.

We are clearly concerned about geopolitical events as the Russian-Ukraine war drones on while Israel faces numerous Iran-backed threats on its borders. We supply weapons and money while trying to avoid getting pulled into a hot war with Iran, China, or Russia. If we do, markets will not react well.

In the meantime, earnings are mixed for many companies in Q3, with dollar strength hurting companies with more than 50% non-US sales. However, according to FactSet, the S&P 500 sells at 17x forward earnings. For now, earnings are running 2.7 % higher than Q3 2022. We shall see whether this continues, or we slip into a mild recession in 2024.

We will be watching these many moving parts carefully.

We wish you all a Happy Thanksgiving!