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 2nd 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.