The Dial Is Steadily Turning

Across the markets this week, sentiment has started to turn.

Folks are no longer fully in “risk on” mode. (Witness the sharp falls in gold and bitcoin recently.) And the insatiable desire to buy everything has started to simmer down.

Perhaps it’s just buyer exhaustion. After all, the Nasdaq and S&P 500’s October highs were up around 58% and 43%, respectively, off their April lows.

But even the most bullish investors should admit that stock valuations are way overstretched. The expected returns from the hundreds of billions of dollars being pumped into AI may never come to fruition.

When markets finally start to realize this, there’s going to be one heck of a realignment.

And beyond all that is a myriad of other issues with major implications for the markets. So let’s check them out now…

Longest Shutdown Ever

The government shutdown is not registering with many investors. But I’m expecting that to change…

Now in its sixth week, this has become the longest shutdown in U.S. history. And until it’s resolved, it will steadily sap confidence among businesses and investors – and that’s going to negatively impact the economy.

All those missing paychecks are not being spent in the general economy.

And now we’re seeing other flow-on effects – such as the Federal Aviation Administration reducing air traffic around 40 major airports as it tries to alleviate pressure on air traffic controllers.

Plus, with the federal bureaus shut down, we aren’t getting key economic data.

When the Federal Reserve next meets in December, it will have been without this information for more than two months (if the shutdown drags on that long).

What’s more, the one piece of inflation data we have seen (September’s Consumer Price Index) showed that year-over-year inflation continues to rise. Longer-term inflation expectations have risen too, according to the University of Michigan’s survey.

That can become self-fulfilling, as businesses increase their prices to cover anticipated rising costs.

Changing Dynamics

This week, there’s also been ADP data showing a 42,000 rebound in private business jobs for October – a marked increase from September’s 29,000 job cuts.

The services sector also returned to expansionary mode, with the Institute of Supply Management’s Services Purchasing Managers’ Index recording its best reading since February.

Without additional economic releases, these data points will make it extremely difficult for the Fed to consider a December cut.

You need to be careful when the market and Fed start heading in different directions. Because any letdown on rate cuts could lead to a sell-off.

I also remain skeptical about the much-touted trade truce with China last week. We haven’t seen any follow-up news. Things have gone quiet. That could unravel at any time.

And bond yields have also been rising. While that might not have an immediate impact on stocks, it could increasingly weigh down the market if yields continue to rise.

It’s all adding up to a more skittish market as these headwinds develop into the end of the year. So remain cautious, and beware of handing back any profits.

Because markets can be forgiving… right until they’re not.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict

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