Markets rally to end Q3 as Fed signals caution and labor strike threat intensified

• Stocks end the qtr. in the plus column.

• Bonds are flat ytd, after a tremendous qtr. rally.

• Earnings starts next week.

• Presidential election enters the final phase and push.

• VP debate tonight at 9 pm.

• Oil down, VIX up, gold steadies.

• Try the Roast Sirloin.

Strike up the band!  Stocks rallied (small) into the end of the 3rd qtr. in the final minutes of trading – this even after JJ appeared to walk back his arguments on the pace and size of rate cuts from the latest FOMC meeting on the 18th.  At a conference in Nashville, JJ said that the FED will ‘lower interest rates over time’ and that he ‘is in no hurry to make further interest rate cuts’ which is a bit more hawkish vs. what he told us then. 

Nicky T (WSJ) follows that up with a piece on page A2 of today’s journal.

“Powell Says the FED Sees No Reason to Rush Rate Cuts”.

Essentially, while JJ said that he will continue to reduce rates, he is just not sure that it has to be as aggressive as it was in September – he went onto say that ‘the overall economy is in solid shape and  we intend to use our tools to keep it there.’

That being said while he did say that economic activity remains healthy, rates were not on a preset path – once again opening the door to ‘bonus sized’ cuts if the job market shows greater deterioration.  In the end – his speech suggested that we can expect 25 bps cuts at the next two meetings – bringing the total move to a full 1% by the end of the year. 

Now do not forget – we will get 2 more months of employment data (NFP report this Friday and another one on November 1st)  to consider while we will also get 1 more month worth of inflation data – (CPI on the 10th, PPI on the 11th and the PCE report on the 31st.)  And since the pace of inflation has fallen (prices have not) the FED is now focused on the jobs market data.

Recall yesterday, I noted that Friday’s NFP report is expected to show 150k new jobs gained in September – but the whisper number is actually much lower, somewhere in the 100k range. And if THAT happens, then we can expect JJ to change his tune rather quickly…. Just sayin’…. Unemployment is expected to remain at 4.2% but again, any uptick in that data point will certainly cause the conversation to turn around as well.

Strike update -

Overnight (12:01 am) the dockworkers along the east and south coasts walked out as contract talks failed – the strike will halt all container cargo and auto shipments, Energy & bulk cargo (grains, minerals and ore – all dry and oil, chemicals and liquified gases – all ‘wet’ or liquid cargo) are NOT affected….….everyday they are not working is a $5 billion hit to the US Economy, a 5 day strike will affect trade thru the middle of November – a longer strike will hurt for longer…. and that will ripple through everything and cause turmoil ahead of the presidential election.

In the end – the longshoremen want HIGHER wages (50% higher) because the Biden/Harris economy is killing them…. They can’t keep up, they can’t pay their bills, they can’t afford to live…in addition- they want a complete rollback of the ‘language around automation’ as well.  Union leader – Harry Daggett made it very clear.

“We are prepared to fight as long as necessary, to stay out on strike for whatever period of time it takes” – and he ain’t kidding!  So let’s see what JJ says next week if this strike continues.

In any event – it has been a great year (so far)… – at the end of the day the Dow gained 17 pts rising 8% for the qtr., the S&P up 24 pts or 5.5% for the qtr., the Nasdaq gained 70 pts or 2.3% for the qtr., the Russell up 5 pts and 9.9% for the qtr., the Transports up 108 pts or 5.5% while the Equal Weighted S&P added 10 pts or 8.9% for the qtr.

As of this morning – YTD performance for the indexes – the Dow +12.3%, the S&P + 20.8%, the Nasdaq + 21.1%, the Russell + 10%, the Transports + 2.5%, and the Equal Weighted S&P + 13.5%.  Not so bad…as we saw the rally broaden out during the qtr.…. with the SMIDS (Russell small and mid-caps) outperforming the group. 

According to the Bloomberg Group Rank Ratings here is how the 11 sectors have performed thru the end of the 3rd qtr.

Tech + 29.6%, Communications + 27.8%, Utilities + 27.5%, Financials + 20.4%, Industrials + 18.9%, Consumer Staples + 16.5%, Consumer Discretionary + 13.2%, Healthcare + 12.9%, Basic Materials + 12.6. Real Estate + 11.5% and Energy + 5.7%.

Further down the chain – Homebuilders are up 30.2%, Retail +7.8%, Airlines +8.8%, Disruptive Tech -9.2%, Value + 13.3%, Growth + 27.5%, Emerging Mkts + 14%, Metals & Miners + 9.9%, Cybersecurity + 10%, Semi’s + 20%, Oil & Gas Exploration – 4%, Aerospace & Defense + 16% - and the list goes on.

Bond prices fell on the news and that sent yields up a bit…. the 2 yr. yielding 3.63% up from 3.55% while the 10 yr. is yielding 3.77% up from 3.73%.  The TLT fell by 0.5% while the TLH lost 0.4%.  YTD – the TLT is down 0.8% while the TLH is +1%.  The AGG Index – Total US Investment Grade Bonds (treasuries, corporates, MBS, ABS and CMBS) is up 2.4% ytd.

Oil – ended the qtr. at $68.29 – down 9% ytd….….by now you know the deal, a weakening China story, a weakening US economy story, an oversupply of oil all outweighing the potential of supply disruptions in the mid-east as the conflict enters another phase.  October 7th marks one year since Hamas began this fight and now Israel is defending itself on the north and south fronts. 

Oil is below all 3 trendlines and is about to test the September lows of $65.10.  This morning oil is down $1.50 or 2.2% at $66.68….as the Saudi’s prepare to increase output and cut prices to punish all of the producers that won’t play by their rules….and trust me – the Saudi’s make money if oil is anywhere above $12 barrel – capisce?  A failure to hold the $65 level could see oil test the 2023 lows of $64….  and if that doesn’t hold - $50 is the next stop.  Now that is dramatic – but that is what the charts tell us.

Gold continues to digest JJ’s latest comments…. Yesterday – it fell by $11 to end the day at $2656 as traders decided to lock in profits after JJ ‘revised’ his outlook. (The dollar index rose on those comments). Swaps traders are now pricing in a 35% chance of a 50-bps cut, down from 53% last week. Remember what I said – do not be surprised to see the trader types take money off the table…Gold has had an incredible move. Up 22% ytd thru the end of the qtr.…. This morning it is up $8 at $2667 as the fight continues…we are stuck in the $2600/$2700 trading range and my guess is the path of least resistance is to the downside.

The VIX (fear index) remains between the trendlines….15 is support with 18.30 resistance. This morning it is up 10 cts at 16.83 – just 8% away from trendline resistance…..…..Yesterday we tested 17.80 – so stay awake…I can feel it building….Again, if we break up and thru resistance, then we could see us test the September high of 23.75….a 30% move up and that will cause stocks to move down.

This morning US futures are all lower… (hmmmm, go figure!).  Dow futures down 110 pts, the S&P’s down 8, the Nasdaq is teasing us – up 10 pts while the Russell is down 5.  Eco data today includes – S&P and ISM Manufacturing PMI’s and both are expected to be weak, remaining in contractionary territory, where they have been for months now.  We will also get the JOLTS Job Openings report…which is expected to be unchanged.

European markets are mixed…. the UK and German mkts are up about 0.3% while France, Spain and Italy are all a bit lower…not big, but lower.  Inflation across the Eurozone ‘slipped below 2%’ – coming in at 1.8%. This seals it (with a kiss from ECB President Christine Legarde) – interest rate cuts are coming. 

The S&P closed at 5762 – up 25 pts.  We are now in a new qtr….so all of the window dressing is done…. The focus now becomes earnings season and any revisions before company’s report…. the banks kick it off- starting October 11th - with reports from JPM, C, MS, BAC, WFC, etc.

Tonight at 9 pm is the VP debate hosted by CBS…. Nora O’Donnell an Emmy award winning journalist, a 60 mins correspondent and CBS Evening News Anchor and Margaret Brennan Chief Foreign Affairs correspondent and anchor of Face the Nation are the moderators…I have been interviewed by Margaret many times when she was at Bloomberg in NYC, (I have not had the pleasure of interviewing with Nora)….She, like Nora, are consummate professionals… So, I have high hopes for an informative yet challenging debate.

Now I still expect to see a pullback, somewhere between 5% - 10%.... I could be wrong, but that is what I am expecting.

In the end – it will be what it will be….…Don’t let your emotions get the best of you during this chaotic time…. Stay focused… Building a strong, well diversified portfolio takes time and commitment. 

Roast sirloin

Get yourself a nice sirloin roast - 5 / 6 lbs.… season with salt and let rest for 20 mins on the counter.  While this is resting, slice fresh mushrooms, chop 2 lg carrots, 2 celery ribs, 1 large onion, select a nice bottle of red wine (I use a pinot noir*), a can of low sodium beef broth and a can of tomato paste.

After resting - season beef with pepper and sear it in a frying pan with Olive Oil making sure to brown on all sides even allowing a crust to form. When complete - place in a V rack in a roasting pan and place in a preheated 275-degree oven uncovered. Allow to cook for 2 1/2 to 3 hrs. or when ready according to the meat thermometer.

After putting the roast in the oven - return to the frying pan - add the chopped veggies to the oil and sauté until tender - 8 / 10 mins.  Add tomato paste and mix… add 1/2 bottle of the red wine and stir - bring to boil and let the alcohol burn off a bit...3 mins.  Add the beef broth and simmer - stirring occasionally.  do not let it dry out… if necessary - you can always add a bit more broth.  After about 30 mins… taste to make sure you like it.  If so - puree 1/2 this mixture and return to the sauté pan. Turn off heat.

 When beef is ready - take out of over and let it rest for 10 mins - covered in foil. Reheat the sauce… slice the roast and arrange on plate - top with sauce.

Try a Malbec with this dish.

*You can buy the wine from WoodenCork.com – use the code ‘WAKEUPKENNY’ to get a 10% discount.