October 23-27 2023

Tactical Signal 9

Sowell’s technical indicators were briefly impacted by last week’s volatility but continue to maintain a strong fundamental position, for now, in anticipation of momentum driven by the upcoming earnings season.

The ongoing concern about interest rates took center stage last week due to the Federal Reserve's potential decision to increase rates further to combat inflation. This apprehension was fueled by Fed Chair Powell's recent speech, which emphasized the importance of maintaining a restrictive monetary policy. Additionally, positive economic data in areas such as industrial production, retail sales, and existing home sales suggested that the U.S. economy was strengthening rather than weakening. Consequently, the stock market experienced a broad decline, with the S&P 500 dropping by 2.38%, and bond markets also saw a decrease of 1.73%. Powell stated last week, 'To date, we've seen declining inflation without causing significant increases in unemployment, which is a highly favorable and historically unusual development.' As a result, mortgage rates reacted by approaching levels not seen in over 20 years, reaching a high of 8%.

In the midst of the third-quarter earnings season, Tesla's shares plummeted by 15.58% last week. The company missed its financial targets, signaling weakness in both the automotive and electric vehicle (E.V.) sectors. Meanwhile, the escalation of the Israel-Gaza conflict led to a rise in crude oil prices, with Exxon Mobil being the only top-10 stock to end the week in positive territory.

As the November 17 deadline for Federal spending draws near and with no Speaker of the House in place, concerns about the possibility of another government shutdown loom large, amplifying the whispers of a potential U.S. credit rating downgrade and market instability. Meanwhile, ongoing geopolitical conflicts overshadow the outlook for this week's third-quarter earnings season and economic reports. Key indicators like GDP, Durable Goods, and Wholesale Inventories will play a pivotal role in confirming the trajectory of the U.S. economy, especially in light of upcoming earnings announcements from major players like Alphabet, G.E., Microsoft, Visa, Boeing, Meta, and Amazon.

"Forecasters generally expect gross domestic product to come in very strong for the third quarter before cooling off in the fourth quarter and next year. Still, the record suggests that a sustainable return to our 2 percent inflation goal is likely to require a period of below-trend growth and some further softening in labor market conditionsThere may also be there may be some ways in which the economy is less affected by interest rates."

– Fed Chair Jerome Powell, At the Economic Club of New York Luncheon, October 19, 2023.

Planet of the Autos Crash Lands

UAW On Strike

Clyde Prestowitz's recent article addressing the ongoing United Auto Workers strike, and his concise economic and historical insights on the Detroit automakers have prompted a noteworthy revelation. The current strike has roots in many factors, with none more intricate than the complex relationship between the Big Three automakers and the UAW.

Clyde explains quite concisely how the U.S. was able to leverage "economies of scale" to create profits from supplying not only the "world's least expensive autos but doing it at high volume." This led to the U.S. Big Three dominating global auto sales.

As with all things comes change. Prestowitz, in his role as Counselor to the Secretary of Commerce in the Reagan administration, had a front-row seat to observe and react to these changes. Exchange rate and tariff changes affected global trade between the U.S., Europe, and Japan. The advantage that the Big Three enjoyed had been degraded, but worse, as Prestowitz explains, is that the Japanese and German automakers "figured out how to make high quality, technologically advanced cars…"

The 80s marked the battle within the war as the U.S. trade deficit with Japan "ballooning," and as Prestowitz explains, the core of this deficit is autos. Americans were buying inexpensive Japanese autos "like hotcakes," while not many U.S. autos were sold in Japan.

This may have been the first of many instances that point to where we are today with the current strike and how the relationship between the UAW is very different than the company workers unions in Japan.

It's possible that this small nuance was already showing itself back then as it was evident that Japanese cars were delivered just in time and were of higher quality, not to mention "the steering wheel was on the wrong side" as the Japanese drive on the left.

The point was that "in-house" unions internalize the worker's relative performance to the company's performance, ultimately tying the worker's current and future welfare to the company's welfare.

This attenuation to company performance may be lacking within the U.S. automakers. In fact, the energy and effort are placed on the results of the battle between the UAW and the Detroit auto companies. Additionally, the UAW cannot strike one company and not another. Can you say misaligned incentives? It would be interesting to ask Clyde about Tesla's manufacturing performance, given that none of those workers are unionized.

Lastly, and to the point, the war may be lost on this last indisputable fact for the Big Three and the UAW. Prestowitz, and most would agree, states that UAW workers are paid on the high side of all American wage earners, a clear win by the UAW - a higher wage than the average auto worker in Japan, Germany, and Transplants.

In layman's terms, this means that UAW members should be and are more loyal to the union than the companies they work for. The UAW has been successful in its battle against the Big Three, but alas, the war may be lost for the Planet of the Autos.

Select Indices as of Oct 20, 2023

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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