It feels like everything is going wrong in the market. The major indexes broke below their 200-day averages, and some 60% of companies that have reported results have traded lower afterwards.
That’s even though the reality actually isn’t so bad. The U.S. economy just registered its fastest rate of growth in two years, inflation has been cooling, and three-quarters of S&P 500 companies that have reported earnings have beaten analyst estimates.
“In all, markets seem to be pushing back on the idea that everything is rosy and fine. And to be fair, it’s not. There’s no denying there is plenty to worry about—from ongoing tensions in the Middle East, to ‘higher for longer’ central bank policy and its effects, to large fiscal deficits, to consumer pressure points,” says Madison Faller, global investment strategist at JPMorgan Private Bank.
Still, is there maybe too much pessimism in the air? She thinks so. “Growth stands to slow, but that’s very different from calling for an all-out stop in economic activity. For instance, the consumer may start to spend less and switch to cheaper brands, but for the most part, everyone who still wants a job has one. This dynamic is actually key to a soft landing, which requires not an acceleration in growth, but enough of a slowdown to ensure inflation pressures can make the last mile of progress,” says Faller.
Another point she makes is that if the economy does slow, bond yields should fall, offering valuation relief to equities. “We may be in an air pocket of discomfort, but the more markets anchor on pessimism, the better the potential for future returns,” she says. “When markets are volatile, it can help to re-focus on what you want from your portfolio in the long run.”
She points to the bank’s 28th annual long-term capital market assumptions: 2.9% annual returns for cash, 5.1% for bonds, 7% for U.S. large-cap stock returns, and 7.8% returns for global equities. Don’t T-bond and chill — historically, every major asset class has performed better than cash over 10- to 15-year horizons, she says. The bank also recommends alternatives like real estate, infrastructure, private equity and hedge funds as hedges against inflation (though it should be said private equity has struggled with higher interest rates).
U.S. stock futures
rose, after two weeks in which the S&P 500
has dropped nearly 5%. Gold futures
traded over $2,000 an ounce. The yield on the 10-year Treasury
rose, while oil futures
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Israel began a ground offensive into Gaza, while Russia had to close an airport in Dagestan after hundreds tried to storm a flight arriving from Tel Aviv.
The economic calendar is loaded this week: the employment cost index on Tuesday, job openings, the ISM manufacturing report and the Fed decision on Wednesday, and nonfarm payrolls on Friday.
There’s also financing estimates coming out of the Treasury Department, as well as the November refunding announcement. “Either Treasury borrowing will stoke further supply jitters or the event will fall into the category of sell the rumor, buy the fact thereby clearing the way for yields to drift back further into familiar territory for leave the foray of 10-year yields above 5% as a fading (and fadable) memory,” say analysts at BMO.
highlights Monday’s earnings releases, in a week that will also see results from Pfizer
Advanced Micro Devices
and the biggie, Apple
on Thursday after the close.
President Joe Biden is going to sign an executive order that requires the industry to develop safety and security standards for artificial intelligence.
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Julius de Kempenaer, senior technical analyst at StockCharts.com, offers this chart plotting the S&P 500 exchange-traded fund
versus the iShares 7-10 year Treasury bond ETF
— a quick-and-dirty stocks vs. bonds measure. He notes that after an uptrend beginning in March, the ratio moved sideways after July, but now it looks like a top has been formed. “As a result, the outlook for the next few weeks remains (firmly) in favor of bonds over stocks,” he says.
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Some meanie towns are banning older kids from trick or treating.
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