Waiting for Certainty

A lot happened this week as the stock market, led higher by the Dow Jones Industrials was followed by the quarterly earnings data from big tech. Not all of it good for the market as the familiar technology names, Alphabet (GOOGL), Microsoft (MSFT) and Amazon (AMZN) released earnings that weren’t what was expected by the analysts. Even our friend Apple (AAPL) came in slightly weaker, but managed to eke out a rally. What’s curious to me is when the Bond Market and Fed interest rates began to rise into the new year, both pushing up the dollar, the initial dialog focused on the direct impact on high growth companies with bloated P/E’s and subsequent compression on EPS and Cash Flow. Add to that consumer activity was focused more on Leisure and hospitality, then durable and non-durables. My point is why was anyone surprised at this week’s results? In my opinion the results show an uncertainty of the prediction giving way to a certainty of outcome, time to move on.

 In fact next week, the Fed will likely vote to raise rates (expected to be .75%), monthly Unemployment will be released (expected to see some slower job growth) , and Midterm elections where a customary swap of party control has historically occurred (expected to result in gridlock), see the pattern? If the economy is slowing, and an increase in the unemployment rate would confirm that, gridlock should also create a pause in excess government spending, or at least moving away from the Modern Monetary Theorists. All of these events are pushing the market away from uncertainty, adding more certainty. However, a lot continues to depend on consumer, and the ultimate result on inflation. Therefore, the volatility isn’t over anytime soon, leaving the Pindudes and Algochums busier than ever. So, what am I looking for.

 The outcome of the Fed is to be expected as the increase in interest rates is have some clear effect on the economy. This week both the Manufacturing PMI (Oct) and the Services PMI (Oct) came in at 49.9 and 46.6 respectively, both under 50 represent a contracting economy. That’s why it’s so important to pay attention to Fed Chairman Powell’s comment after the November 2^nd meeting as I’m confident they will see the Unemployment data before we do. When the Unemployment data is released on November 4^th it will be important to see smaller growth in payrolls and some increase in the unemployment rate, to further confirm economic activity slowing. The last piece of news will be the midterm elections, that could result in the kind of gridlock that in the past required actual bipartisan cooperation, although I’m not especially confident that will happen.

In my opinion, our modest exposure to both Fixed Income and overall, Tech exposure in favor of Healthcare, Financial and Industrial sectors have been beneficial offsets. Going forward, the careful increase in Consumer Discretionary, with focus on income and recession friendly products and services should see some new names in the portfolios.  Either way, the three events mentioned in the above paragraphs will introduce some certainty into the markets and offer an opportunity to generate some optimism, not yet to be confused with being bullish, but definitely a good place to start.