October 16-20 2023

Tactical Signal 9

Amidst the growing uncertainty stemming from global macro events, it’s important to emphasize that economic and earnings fundamentals are holding steady, which is particularly reassuring as we approach the upcoming earnings season. Bolstering this confidence is a robust earnings report from the banking sector, firmly supporting Sowell’s technical indicators that maintain their full position.

Amid the ongoing Israel-Hamas conflict, the third-quarter earnings season commenced last week with a noteworthy performance from the banking and financial sector. JP Morgan, Blackrock, Citigroup, Wells Fargo, and PNC Financial all reported earnings that surpassed expectations, primarily attributed to a significant overachievement in net interest income, as highlighted by JP Morgan.

On the economic front, the highly anticipated September inflation report revealed a 0.4% increase, contributing to a year-on-year rise of 3.7%, driven by elevated food and energy prices. Additionally, the Social Security Administration made a significant announcement last Thursday, confirming a 3.2% cost of living adjustment to benefit 71 million recipients starting in January 2024.

In the midst of these developments, the financial markets experienced mixed results, with the S&P 500 posting a gain of +0.47%, while the Nasdaq Composite declined by -0.18%. The strong earnings in the financial sector provided a modest boost to equities, while the technology sector showed a more subdued performance. Bonds, on the other hand, saw a rally, reflecting increased uncertainty due to geopolitical conflicts and a decline in investor sentiment, with a gain of +0.95%.

As geopolitical uncertainties remain a significant factor, the focus in the coming week will be on continuing the third-quarter earnings season, led by heavyweight companies such as Charles Schwab, AT&T, Goldman Sachs, Tesla, TSMC, and American Express. On the economic front, reports on industrial production and housing starts will shed light on the impact of rising interest rates and mortgage rates, with added anticipation surrounding the Federal Reserve's upcoming decision on October 31.

Currently, U.S. consumers and businesses generally remain healthy, although, consumers are spending down their excess cash buffers. However, persistently tight labor markets as well as extremely high government debt levels with the largest peacetime fiscal deficits ever are increasing the risks that inflation remains elevated and that interest rates rise further from here."

– Jamie Dimon, Chairman and CEO of JP Morgan Chase, JP Morgan Chase 3Q23 Earnings Press Release, October 13, 2023.

Remember Stocks, Not Inflation

Newsweek Cover

One of the most famous business magazine covers was published on August 13, 1979. BusinessWeek's cover story was "The Death of Equities: How inflation is destroying the stock market." The article sounded the alarm that equities were not providing adequate returns in an inflationary environment of over 11%, and institutional money would flock to alternatives such as mortgage-backed bonds, foreign stocks, venture capital, stock options, and futures. Banks even allowed customers to put diamonds and precious metals into their retirement accounts. 

The article states, "As it is, the nation's financial markets and capital flows have been grossly distorted by 13 years of inflation. Before inflation took hold in the late 1960s, the total return on stocks had averaged 9% a year for more than 40 years, while AAA bonds—infinitely safer—rarely paid more than 4%. Today, the situation has reversed, with bonds yielding up to 11% and stocks averaging a return of less than 3% throughout the decade."

Later, Gershon N. Mandelker, associate professor of business administration at the University of Pittsburgh, stated, "The current Administration is capitalizing on this antibusiness sentiment. 'People like to have villains, and Carter is blaming the oil companies for our economic problems,' he says. 'Inflation is caused by government printing money, not by sheiks raising oil prices.'"

The story concluded, "Today, the old attitude of buying solid stocks as a cornerstone for one's life savings and retirement has simply disappeared. Says a young U.S. executive: 'Have you been to an American stockholders' meeting lately? They're all old fogies. The stock market is just not where the action's at.'"

The day that issue was published, the S&P 500 closed at 107.42. Ironically, a mere seven months later, the S&P bottomed out on 3/27/1980 at 98.22. 

From that point forward, the market has never reached that low. Five years later (1984), it closed at 165.83. Ten years later (1989), 343.06. Forty years later (2019), 2926.32. On August 11, 2023, it closed at 4464.05 – the product of a decades-long bull market, an 8.8% annual return rate over the 44 years since the article was published, and the same rate of return the article wistfully longed for.

"Don't give me timing, give me time." – Wall Street legend Jesse Livermore.

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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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