Turbulence From Headwinds But Reasons To Get Positive On The Market

October 18, 2023
Weekly Market Outlook
By Donn Goodman

I was on a long flight last week. We hit a couple of rough patches of turbulence. The pilot said that we faced some stiff headwinds as we were going east to west against a strong jet stream. Reminded me a lot of the economic scenario right now and the accompanying market actions we have experienced since early September.

While this is typical seasonal action, it has also been mired with turbulent economic inputs, higher interest rates and enhanced geopolitical risks.

As you will soon review in the Big View offered below, RISK OFF was the theme of this past week. However, underlying technical conditions may have held up enough to launch us into the positive seasonal effect that typically occur from late October until year-end. But we certainly are not there yet. The technical indicators are improving, ever so slightly.

So where is the turbulence coming from?

We could probably confine it to just a few major headwinds, which I describe briefly below:

Geopolitical Risk. Several incursions overseas have pulled US attention and peripheral actions. Whether it is the Mideast, Ukraine or Asia, the question remains on whether the US will find itself more engaged. The market typically doesn’t like this type of uncertainty. Interestingly the markets have held up well in past geopolitical uncertainty. Also, the market is in the early stages of a new bull market that began 12 months ago. All while the situation in the Ukraine had deteriorated.
A tick up in Inflation. We have now had 3 months of rising inflation numbers. The September PPI and then CPI numbers were released this past week, and surprised with rising monthly numbers. Annualized rates of inflation on the CPI (3.8% yoy) have now increased since July. This, after the big cooling off period that began in mid-2022. More concerning perhaps is the forward expectations for inflation. “1-year inflation expectations also jumped to 3.8%, the highest level since May. Five to 10-year expectations moved back up to 3%.” See chart below:

Read Last Week's Market Gauge: The Canary in the Silicon Mine

Interest rates continue to stay high. With some of the recent geopolitical stress and indicators showing economic weakness, many believe the Fed is done hiking rates. However, there is no doubt that interest rates will stay higher for longer. Also, the futures markets that predict forward interest rates are not factoring in any type of interest rate cut until the second half of 2024.
Credit has grown tight and corporate bankruptcies have spiked. There is no doubt we are in a credit crunch and most consumers are being hurt by higher interest rates. Mortgage rates hit 8% this past week and indications are that mortgage applications have come to a screeching halt. Also, home foreclosures have been surging. They are at their highest level since the start of the Pandemic.

There have also been 516 corporate bankruptcies already this year which has surpassed 2021 and 2022. See chart below:

Poor Treasury Auctions hurt bond performance which affected stock prices (Thursday and Friday). The 30-year Treasury auction went off poorly. The spike in rates (part of the auction process) immediately prompted a sell-off in stocks.
Significant reduction in consumer sentiment readings. “The headline consumer sentiment gauge plunged to 63.0 (67.1 exp) from 68.1, led by a big drop in expectations (from 66.0 to 60.7).” This will certainly affect retail sales and consumer discretionary purchases soon. See chart below:

These factors and others are pushing volatility higher. Also, remember October can be a mixed bag. We started the new bull market 12 months ago and new bull markets are never without some uncertainty as well as enhanced volatility.