Good morning,
Starting today, I am going to shift the cadence and scope of my Morning Notes to once per week—on the first day of the week—with a review of the prior week combined with a look ahead to the next. Think of it as a Review / Forecast format.
With volatility as low as it has been—even through a war—a weekly review and forecast should be more than enough to accomplish my intentions for the Morning Notes. Should volatility spike and a break in the markets develop, I’ll turn up the volume in an effort to soothe nerves and provide perspective.
Review
The dominant theme last week was another sharp selloff in global bond markets, with the U.S. 30-year Treasury yield touching its highest level since 2002 at midweek. Rate-sensitive equity sectors suffered the most, with financials posting their second-worst September in 15 years.
The week ended on a more constructive note after Friday’s September nonfarm payrolls came in far below expectations, reducing near-term pressure on the Fed to hike rates again this month (10/28).
The battle lines in the equity market are clearly drawn—and have been for weeks now: rising rates vs. the AI complex.
The divergence in performance is stark. Money continues to flow toward technology and the AI infrastructure complex at the expense of non-AI areas of the market that are more exposed to higher interest rates—financials and small-cap stocks, for example.
What’s Ahead
The week ahead has little in the way of A-list macroeconomic data, and Q3 earnings season does not begin until next Tuesday.
That leaves us watching for news—or the lack thereof—from the Middle East and its effect on oil prices. We’ll also be watching the bond market muddle through some large Treasury issuances without the benefit of fresh inflation data—CPI is next week—as a possible tailwind. Wishful thinking, perhaps.
Market Message
The S&P 500 Index is 85% above its long-term trendline, while earnings are 66% above their long-term trend—both among the highest readings in decades. Historically, when both prices and earnings have been this extended, subsequent returns for the Index have been below average for as long as five years.
This is not a short-term timing tool. Rather, it is a reminder that the recent performance of both the stock market and Corporate America is not typical.
Similarly, last week the S&P 500 was within 1% of its record high while fewer than 25% of stocks were above their 50-day trendlines and fewer than 45% were above their 200-day trendlines—the first time that combination has occurred on record.
“Firsts” in market history shouldn’t be dismissed. We remain watchful for an inflection point—perhaps as soon as next year.
From a shorter-term perspective, the market weakness in Q3 did generate some sell signals, but no stop-loss signals—yet. At the same time, the cycle work is just beginning to turn positive.
Part of the strength in the composite cycle comes from the four-year presidential cycle. Midterm election years are typically choppy, often reaching a low in early October when the political and economic outlook can be particularly uncertain. But as the election results become clearer, the market has historically tended to rally strongly, often well into the third presidential year.
So, that is hopeful.
Be well,
Mike