October 4, 2023
Weekly Market Outlook
By Keith Schneider
Equity markets have been under extreme pressure over the past month (-5% on average), hit by waves of selling. The divergence in performance YTD between the NASDAQ 100 (QQQ) and the Russell 2000 (IWM) is 33%, hitting extreme levels that we saw at market peaks like in 2000.
Mish compiled a list of issues overhanging the markets earlier this week in one of her dailies. Here they are in no particular order:
- China-trade wars and chip wars
- Oil and food inflation
- Strikes
- Government shutdown
- Corporate and individual bankruptcies on the rise
- Commercial real estate and banking
- Fed-rates higher for longer
- Political polarization
- Social Unrest-how far can folks be pushed economically
- Geopolitical concerns – Russia and how far will they go “
Directly looming over the markets this weekend is the Debt ceiling issue. It needs to be lifted, and if Capitol Hill can‘t agree, a default is on the horizon, along with a government shutdown.
Additionally, If Capitol Hill cannot get its s***t together, a downgrade of US debt by ratings agencies will happen.
From a recent historical perspective, in 2011, stocks dropped by 11% from late July to early August before a debt ceiling agreement was reached, but then a credit downgrade hit anyway. Stocks were down 19% by mid to late October before recovering and rallying into the year-end.
We could see a similar pattern this year, but considering the staggering ($33 trillion) national debt that the US now owes, the stakes are much higher. The world may not be as amenable to purchasing US treasuries, potentially raising the cost to borrow, and have a draining effect on the economy.
The takeaway is that prior debt ceiling issues were a great buying opportunity in the longer term, but that may not be the case now as domestic political issues are worse than ever and interest rates are at highest levels in well over a decade and still climbing.
Looking at markets through the eyes of one of the best Elliot Wave analysts out there (Jeffery Huge from Alpha Insights), the charts below indicate a major selloff is underway.
On a positive note, markets are oversold, sentiment and market internal indicators are looking overdone, so if we do get an agreement on Capitol Hill the market is primed to rally hard.
Another factor supporting a rally is that is the Calendar range effect that is extremely positive, and starting shortly as shown on the charts below:
