October 9-13, 2023

Tactical Signal 9

Sowell’s technical averages weathered last week’s market volatility and cautiously remain in full position (100%), helped by positive economic reports on jobs, unemployment, and a surprise decline in consumer credit.

Last week's hot jobs report, coupled with an unexpected decline in consumer credit, injected new life into the equity markets as October got underway. This positive momentum managed to overshadow the prevailing political turbulence in Washington. With a labor participation rate of 62.8%, which still lags behind the pre-pandemic level of 63%, the resilience of the US employment landscape was underscored by what originally was a down week, with S&P 500's gaining 0.52% during the first week of October. This newfound strength spilled over into the bond market, particularly in the 10-year and longer-term segments, which saw yields rise and a gradual narrowing of the yield curve inversion, resulting in declining bond prices. Bloomberg Long-Term Treasuries, for instance, experienced a weekly decline of -3.78%, marking a year-to-date loss of -12%.

Equity markets reversed their September downturn, with Technology and Communications stocks leading the way. Notable giants like Apple (+3.67%), Microsoft (+3.65%), Alphabet (+5.14%), NVIDIA (+5.20%), and Meta (+5.07%) played a pivotal role in pushing the S&P 500 into positive territory.

Despite the US government managing to avert a temporary shutdown, geopolitical uncertainties are on the rise. The upcoming November 17 deadline, the absence of a house majority leader, and last week's conflict involving Israel add to the current climate of uncertainty. The US dollar, benefiting from these geopolitical uncertainties and an unexpectedly robust US economy, has prompted a cautious stance on fixed-income investments. This caution is warranted, as it appears that bond yields are poised to continue rising.

While economic fundamentals continue to exhibit strength, the cloud of interest rate fluctuations and geopolitical uncertainties looms, especially with the ongoing wars in Israel and Ukraine. The week ahead will shed light on third-quarter earnings reports, with a particular focus on diversified banks such as Citigroup, JP Morgan, and Wells Fargo. These reports will provide valuable insights into the impact of rising interest rates on financial institutions. The forthcoming inflation report, scheduled for Thursday, is poised to shape the narrative surrounding the Federal Reserve's October 31st meeting.

"Well, the point of "rolling recession" is that those categories have had recessions, they've gone into recessions and in some cases haven't yet pulled out. It's just that we had the later offsetting strengths on the services side. So the recession has been more of a roll through as opposed to, again, the bottom falls out all at once."

– Liz Ann Sonders, Managing Director and Chief Investment Strategist at Charles Schwab & Co, Sowell Fireside Chat, September 28, 2023.

Mortgage Rates – Not a Recession Psychic


On July 26, 2023, Federal Reserve Chair Jerome Powell announced during the July Federal Open Market Committee (FOMC) Meeting that the FOMC was no longer predicting an imminent recession. However, economists have repeatedly warned of an impending economic downturn. These concerns have been amplified by recent Fed Funds and 30-year mortgage rate spikes, reminding many of the lingering effects of the 2007-2008 Global Financial Crisis.

For the past 15 years, the Federal Reserve has pursued a monetary policy characterized by liquidity injections and near-zero interest rates, resulting in historically low mortgage rates. During the pandemic, 30-year fixed mortgage rates reached a remarkable low of 2.6% while the Fed Funds rate remained at zero, benefiting first-time millennial homebuyers. In contrast, before the financial crisis, mortgage rates for older generations, including Baby Boomers and Gen Xers, typically ranged from 5.2% to 7%, but foreign for millennials.

While the housing market is anticipated to decelerate over time, recent data from Realtor.com indicates a persistent shortage of homes. The average home now spends 48 days on the market, one day longer than the same period last year but still two weeks less than the period between September 2017 and 2019. The most recent report on existing home sales reveals a supply of only 3.3 months, representing the number of months it would take to deplete the current inventory at the current rate.

Let's remember that the United States has seen its fair share of economic turbulence in the past 23 years, with recessions popping up like surprise parties. There was the Dot-com bubble, the Global Financial Crisis, and the Covid-19 recession, but here's the twist—mortgage rates caused none of them. In fact, the most recent September nonfarm jobs report was so good it could make an economist blush, with 336,000 jobs added (beating the consensus of 170,000) and an unemployment rate of 3.8%, which is better than the maximum unemployment rate. So, to all the doomsayers predicting the end of the world as we know it, it might be time to revise your apocalyptic calendars once again. Like a cat with nine lives, the economy seems to have more surprises up its sleeve.

Economic Reports 10.9-10.13

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.


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