Negative is the New Positive

 This week saw the broad indexes rise enough to take us in the direction of being overbought. Much of the activity has been on the back of economics, the Fed, and earnings. While we welcome favorable earnings where we share them, overall, this earnings season has been mixed, with current data being good alongside of cautious future guidance. Likewise, analysts are okay with maintaining buys on many stocks, Afterall most stocks are down this year more than the S&P 500 (as of today -21.9%), but they’re careful on predicting a target price. In my opinion that translates into what is impacting most of us, namely, if the economy slows down, markets will rally, if unemployment goes up, markets will rally, and if companies do well, well, that feeds volatility. What does that mean?

The Federal Reserves is going to meet on November 2^nd and reveal their actions to increase interest rates. The narrative surrounding that decision is meeting curious pushback. For example, the UN recently decided to ignore the genuine threat of inflation to instead focus on the threat of economic slowdown and its impact on the less developed countries. This is not unusual, although in my opinion, strong economic growth in leading developed countries has historically been the best medicine to relive stress on many underdeveloped economies. There is also the narrative of Fed governors with voting privileges, contradicting one another about how much to increase interest rates at the next meeting. Infighting is not uncommon within the overall board, in fact is there any good reason why there shouldn’t be? Another headwind, that has been discussed here, is the potential for the Fed to be careful not to be too aggressive in the face of upcoming midterm elections. That would be true if Fed Chairman Powell was a loyalist, but his recent speeches over the year have frequently quoted Paul Volker, the Fed Chairman that last faced an inflation crisis to raise rates without the permission of politicians. Today, CNBC noted a poll that suggested civilians were less confident with Fed than with Congress. I’m not sure that’s possible, but I’ll go with Powell doing the right thing.

 The war in Ukraine is a changing uncertainty, just as the confirmation that Chairman Xi of China will maintain his rule for the unforeseeable future, and is even recently being compared to the infamous Chairman Mao Zedong. What this means for quicker focus on Taiwan is also a real uncertainty. Likewise, North Korea wants to join the bad guys and has recently sent missiles to the South Korean border, maybe for some much needed attention, maybe not. All these events would be initially unfavorable for the global markets, but not necessarily catastrophic and eventually negative news would likely be construed as positive news. But, in the meantime, not to be ignored.   

 The best focus, in my opinion, is that on inflation, The Fed and the Economy. For now, there is evidence that economic growth is slowing, albeit in specific sectors. With next month’s Unemployment data coming out after the Fed meeting, it’s likely the Fed action will give the markets some insight into what that data will reveal. As the economic negatives add up, the markets will adjust away from the prevailing economic cycle towards the future economic outcome. In the meantime, it’s worth noting that consumers aren’t stupid, being fiscally disciplined is both an outcome of ability and that of necessity, and managing through a recession is something most citizens have lived with at some point in our lives. That outcome will reverse the current dynamic and then positive will become the new negative. Good times outweigh bad times, and the last few years should create a future well worth being prepared for.