Good morning contrarians! Welcome to October. Welcome to the fourth quarter. This episode is free for all. If you like it, subscribe to become a regular reader.
It was a pretty tumultuous September, with a whole bunch of moving parts, none of which were taken particularly well by investors. Not gonna recap them all because that’s boring AF, but suffice it to say the S&P finished the month down almost 5%, breaking a seven-month winning streak. The Nasdaq did a bit worse, down 5.3% whilst the Dow gave up 4.3%.
It was the worst month of the year for the three major indexes and worst since the height of the pandemic (March 2020) for the S&P. And we’re now on track for the worst week since last October.
Will this October be any better? Impossible to say for sure, but it stands to reason that things are set up for investors to buy risk assets. This for reasons I explain on the podcast. Too much to type out.
The key issues to watch (in no particular order): Slowing growth, less accommodative monetary policy, China, supply chain bottlenecks, inflation fears, natural gas prices. Of course inflation fears and monetary policy are very much tied together. Stagflation, or inflation without growth, is a bit different but probably not a very realistic concern. More something that financial media and others have started throwing around because it sounds cool and dramatic. The point is that growth doesn’t really appear to be slowing. Supply chains and natural gas prices should prove temporary and anyway don’t change the (healthy) demand picture.
That leaves China, which is especially pertinent because interest appears to be fading. We won’t be hearing much over the next week. It’s the mid autumn festival so everything in China and Hong Kong is closed. Not expecting any updates on Evergrande then. (Be sure to read our Evergrande primer, which is also free).
Today’s Key Events
The Personal Consumption Expenditures, or PCE, Index reading is out at 0830. This is the key inflation metric watched by the Fed. There has been a lot of noise about the Fed’s inflation concerns lately. Expectations are for a 0.6% month-over-month reading for August, above July’s 0.3%. The core figure is expected to clock in at 0.2%, slightly below last month. Year-over-year core PCE is expected to be 3.5%, slightly below last month’s 3.6% reading which was the highest level since 1991.
Those are pretty big numbers (and 1991 was a long time ago) but the Fed has effectively telegraphed they will be announcing a start to bond purchase tapering at their next meeting in November. When interest rates are raised after that is still an open question. If the PCE reading comes in hot, it should increase expectations for a hike. Watch the Fed fund futures to see what’s being priced in.
Finally, there’s still some haggling in Washington D.C. over the infrastructure bill. The latest there is House Democrats dropped plans to vote on the bill, presumably because it isn’t progressive enough for some members of the party. I deliberately didn’t include this as a key thing to watch this month because it is fully expected to be resolved and markets stopped caring about it awhile ago (if indeed they ever cared all that much in the first place). They key risk of a government shutdown is resolved through Dec. 3.
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Welcome to Q4: Daily Contrarian, Oct. 1