Investment Insights

 — Steve Orr 

Very different

Do you get tired of winning? We do not. Our indicators have kept our clients on the front row of this Secular Bull since we turned them on. Depending on who is buying at the bar, we can argue the Bull is either 15 or 13 years old. We are in the camp of the March 2009 bottom and turn marking the prior Secular Bear. Another just as valid argument would be the valuation low made by the S&P 500 in 2011. Either way, this is a mature Bull.

The Secular Bulls since WWII lasted 24 years (1942 – 1966) and 18 years (1982 – 2000). Note those start dates. Both started in periods of changing inflation, looming recession and bond yields controlled by the Fed. Good reminders that stocks lead the economy and policy makers. Secular periods in markets are built by cycles, both Bull and Bear. During this Secular Bull, we have weathered cyclical Bears in 2011, the China stock scare in 2015 – 16, 2018, and, of course, the shutdown in 2020. Each time, an accommodative Fed and favorable growth backdrop contributed to a quick return to Bull conditions.

September should have posted a mini-Bear for stocks. Prior election year Septembers see the S&P 500 and Dow Industrials slip an average of -0.7%. Thankfully markets were primed for and pushing on the Fed for a rate cut. China followed suit with a very impressive suite of stimulus programs. More on that next week. Lower rates and possibly a bottoming economic slowdown helped most stock indices to a 1.5% or better gain for the month. A very different return set for an election year September.

October surprise

Since it is playoff time in baseball, we are waiting for a star player to become the next Mr. October. Election years unfortunately also have “October Surprises.” The trope likely has roots in the 1956 Suez Canal blockade and unrest in the “new” Soviet bloc countries. The timing of those crises may have helped Eisenhower get elected. More recent surprises have focused on dirty laundry hung out by one party against the opposing candidate.

Strike one

Today, we have a trifecta to start October. Now that missiles are flying from Iran into Israel, we have moved that conflict from #5 on our War list to #2, behind the ongoing cyber war we are fighting with China, North Korea and Russia. Iran’s use of ballistic missiles will require a response from Israel. At the very least, war events push up bond prices, oil and the dollar and down stocks. At home, we have the Longshoremen’s strike and hurricanes.

Strike two

We spent the summer waiting on the longshoremen port strike, and sure enough they walked out Monday night. Christmas is just around the corner, but this strike has been on the transportation radar for the better part of a year. Our retail sources give us the impression that a lot of Christmas deliveries were moved up. Same with car parts and imported vehicles. Most imports have more than 80 days of inventories. Likely the first short-term effect will be more expensive bananas or just not available.

The union also wants a “total ban” on automation in the ports. This one we find a bit hard to swallow. If you want an example of what the union is afraid of, go to YouTube and search for China fully automated port in Tianjin. Short-term for us: higher food costs. If the strike goes two weeks or more, we will start making cuts in our fourth quarter GDP estimate.

Strike three?

Long-time readers know we like to focus on the economy and its effects on our portfolios. Markets regularly give us refresher courses in humility. As a result, we like to keep a light touch in our writing. Hurricane Helene is another matter. The disaster that is unfolding in North Carolina and surrounding states is very serious. At this writing, there are no good estimates of the number of missing. Road and rail repairs are going to take months. I-40 and I-26 are closed in multiple locations.

With what we can glean to date, western North Carolina and parts of the surrounding states may be “offline” economically for months. The global chip manufacturing industry depends on two quartz mines in North Carolina. Those mines provide a quality of quartz that every chip manufacturer depends on. Yes, the easy course is to mark down GDP and earnings estimates for the fourth quarter and first quarter of next year. By how much? We do not know yet but taking GDP down a half of a percent to 1.5% and earnings growth from 3% to 2% is a good start. And Kirk was just upgraded to a Category 1 hurricane.

History lesson

Election year Octobers average a slight loss, like their September forebears. Election October performance is pulled down by elections where there is not a sitting president running for re-election. And this year certainly the presidency is “open.” Easy money from the Fed and stimulus (raining money) from the administration gave us an unusual September.

Will October be just as good? Earnings season for the third quarter starts in two weeks. Analysts have steadily dropped estimates for earnings per share, now just +3.2% for the S&P 500 members. Per above, today we think that drops to 2%. But easy money is a powerful elixir for the Mr. Market, and October could continue the rally. A quick look at this week’s indicator scores shows the rally is hanging in there, tilted toward the U.S., large cap and a (very) small signal for emerging markets.

This Friday’s job report for September should show a net gain of around 150,000. That level would bring the three-month average to 127,000 net- new jobs. That is nearly half the 239,000 monthly average of the first five months of this year. Fed Chairman Powell thinks the job market is roughly in balance. If so, then the so-called “soft landing” is here. We would prepare ourselves for rising jobless claims as firms dependent on ports start laying off workers and the effects of Hurricane Helene hit firms. The unemployment rate likely held steady at 4.2%.