S&P 'kisses“ 5,800 – Investors juggle Fed moves, bond yields, and economic signals

Stocks closed higher on Wednesday…. the S&P kissing a new century mark – 5800 while the other indexes moved solidly higher as well.  The Dow gaining 432 pts or 1%, the S&P up 41 pts or 0.7%, the Nasdaq up 109 pts or 0.6%, the Russell up 5 pts or 0.25%, the Transports up 89 pts or 0.6% and the Equal Weighted S&P up 51 pts or 0.7%.

Mortgage apps fell by 5%, Wholesale Inventories all came in below estimates which could mean a couple of things.  It could mean that wholesalers are selling their goods FASTER than they are replenishing them. Now that could mean that demand is increasing, or it could mean supply chain issues – think production slowdown, shipping delays or material shortages.  Now in a broader context, falling inventories suggest future UPWARD pressure on prices, if demand remains strong and supplies struggle to keep up.  Now, it could also mean that wholesalers are reducing stock to avoid oversupply if they sense that demand is weakening…so in the end – pick a side! 

Understand that IF wholesalers were worried that demand is weakening THAT would have been the headline in the news today, but it is not, in fact – the headlines suggest nothing but wine and roses ahead.  (think strong demand, which suggests a strong consumer which suggests better days ahead).

And then we got the FOMC mins at 2 pm – and there was nothing in it that surprised anyone.  The jury was split – half wanted 50 while the other half wanted LESS than 50 and one or two wanted to do nothing….They agreed that the pace of inflation is fading – that’s good, but they also saw ‘potential’ weakness (potential is not actual) in the labor market….In the end – it was JJ who pushed for the jumbo cut (he is the Chair) and that just might mean that he wanted to make a statement just weeks ahead of the chaotic, contentious Presidential election…Didn’t want to see the market sell off as we moved into the final crucial weeks…and you see, this is where it gets partisan. 

JJ and the FED are supposed to be agnostic, in fact, the FED is not supposed to move on rates in either direction 6 months ahead of an election for fear of being labeled partisan (barring a major event) no less move on rates within 6 weeks….but it is what it is.  Apparently a 25-bps cut would have been fine - recall they had prepared us for that for weeks – it was only during the blackout period that THAT narrative changed – thus the Front-page stories in the WSJ and the ‘breaking reports’ from Goldman and other big banks.

Once they ran the story and the markets got excited about a jumbo cut (due to a weakening labor market – which does not appear to be the story), it would have been tough to go back, it would have disappointed markets and stocks would have sold off, causing broader angst for investors and for ‘everyone else’ just ahead of early voting. (You can define ‘everyone else’ anyway you like, I have my own definition). In any event – the sense is that JJ has the market’s back as we move into the end of the year.  Which also explains why the market has reacted completely opposite to historical and seasonal norms.  But hey, I am NOT complaining – my portfolio has done just fine!

Bonds though did a funny thing…. prices fell sending yields UP.  The 10 yr. rising 5 bps to end the day at 4.07% - kissing and then penetrating the intermediate term trendline at 4.06%.  This morning it is higher still at 4.0785%.  Now remember what we discussed – if this happened – that sets up the yield to test the long term trendline at 4.16%.

So here is today’s lesson on what rising bond yields mean.  It could mean that investors are expecting the FED to RAISE rates in response to inflationary pressures or a HOT economy.  It could also mean that investors are demanding higher yields to compensate for expected inflationary trends that erode purchasing power. It could mean that the gov’t is ready to spend even more money – something that both candidates have promised to do, and this increases the need for Janet to bring MORE bonds to the market to support this spending - more supply will push prices down and yields up.  It could also mean stronger economic growth – that would move money from bonds (safe and boring) to stocks (riskier but much sexier). 

But here is the rub – at some point – bond yields will keep stocks from rising…the question is ‘What is that point?”  Well, it’s not 4%, not 4.05% so, it’s your guess…This morning 10 yr. yields are pushing 4.075% and stock futures are down…. just sayin….

Oil had an interesting day yesterday…. Trading as high as $74.50 and as low as $71.50 – before settling at $73.36. Hurricane Milton driving up demand for gasoline, while the EIA told us that US crude inventories ROSE by 5.8 mil last week to 422.7 million barrels.  Crude production up 25k bpd to 13.28 million bpd week over week.  JoJo spent 30 mins on the phone with Benny to discuss what the next move will be concerning Iran…. All of these headlines causing oil to thrash around in a $3 range.  This morning – oil is up $1.20 or 1.6% as we continue to wait for that Israeli response.  Oil is now in the $71.50/$74.50 range.

Gold fell yesterday – down $9 to end the day at $2626. And this morning it is up $8 at $2634 – all as gold bugs continue to argue over what’s next.  I would not be surprised to see it test $2600 – especially if the narrative becomes NO rate cut in November.  The dollar index – has rallied substantially in the past 2 weeks, rising 2.7% on that very idea.  A rising dollar will put some pressure on gold from a financial perspective – stronger dollar = weaker commodity prices, and if global angst subsides that will also put pressure on gold as investors move out of the ‘safe haven’ trade into the ‘growth trade’.  (Remember that rising global angst will support gold from a ‘safe haven’ perspective).

US futures are all lower…  Dow futures -38 pts, the S&P’s -8, the Nasdaq -40 pts while the Russell is down 5 pts. This as the market awaits today’s economic data…. the September CPI report which is expected to show the pace of inflation in decline is keeping traders on the edge of their seats.  Now look, if that is true, then don’t be surprised to see the markets breathe a little and back off after the move higher this week. I think the real focus is now earnings…. the CPI and PPI data is no longer the big bad boogeyman that it was…. (unless of course it suddenly spikes higher – which it is not expected to do).

We will hear from DAL and DPZ are due to report today (but neither one is a Dow stock, so it is not the official start of the season).  DPZ beats $4.19 vs. $3.62 – a 15% beat…. while we wait for DAL to report. the Street expectation is $1.51…. but company expectations are for a beat!  Can you imagine that?  The company expects to ‘beat the street estimate’!  Amazing.

Fed’s Johnny Williams and Tommy Barkin are both speaking today. Earnings from JPM, BLK, WFC kick into high gear tomorrow.

All European markets are all in negative territory except the ‘Mother Country’ (Italy) up 0.2%.    

The S&P closed at 5792 – up 41 pts…. after trading as high as 5796…. Yesterday I thought we were topping out, I guess I was wrong!!!  LOL.  I guess we will trade lower when I no longer expect it…. In the end though, it doesn’t really make a difference to the long-term investor…. why?  Because he/she has a plan, they have a long-term outlook, they are not distressed by drawdowns, they welcome them to put more money to work.  So, If I have to wait a bit longer to put more money to work, then so be it…If the market moves up – I’m participating and so should you and when it backs off will be the time to add.   

Rigatoni with sweet sausage and tomato cream sauce

For this you need:  Rigatoni Pasta, Garlic, Onions, Sweet Sausage, White Wine, Heavy Cream and Crushed Tomatoes.

Heat a pot of salted water on low – so that you get it ready for when you need it in about 40 mins.

Heat olive oil in a pot...add crushed garlic and one diced onion (Vidalia if you can get it).  Sauté until soft and sweet, next add the sausage meat - which you have removed from the casing - until brown.  Next add 2 cups of dry white wine and let the alcohol burn off.... open 28 oz can of plum tomatoes and rough crush - so that it is a bit lumpy. You can use your hand or quickly pulse them in a food processor. Add to the pot.  Bring to a boil and then immediately turn to simmer and let it cook for 30 mins.  Stir - Don't go too far because you will need to stir again and again.

After 30 mins – Turn off the heat and let it cool for 5 mins.  Now add 1 cup + a little more of heavy cream (you can use lite cream if you prefer - but heavy cream gives it a richer taste).  Stir well.

Now – turn the water up to high and add the Rigatoni’s.  

Cook until aldente - 8 / 10 mins...strain - reserving a mugful of the pasta water.... Add the pasta directly into the sauce and stir - making sure to coat well.  Add a handful or two of parmigiana cheese and mix.  If it looks like it needs some more liquid -add a bit of the pasta water to moisten.  Serve immediately - offering more grated cheese to your guests.