November 6-10, 2023

Tactical Signal 9

Sowell’s technical indicators exhibited a degree of strengthening and were in full position compared to the prior week’s correction as equity markets gained momentum.

Ladies and gentlemen, last week brought a plot twist that even the most seasoned financial forecasters couldn't have penned. The FOMC's recent interest rate decision left investors with eyebrows raised and calculators working overtime. For the second meeting in a row, they decided to keep the interest rates in a holding pattern, as steady as a hawk-eye on a mouse.

As the news rippled through the financial markets, major equity averages flexed their muscles, gaining over 5% like they had just discovered a stash of hidden treasure. Leading the charge were the Financial and Technology stocks, which sprinted ahead by 7.4% and 6.8%. Investors responded to the Fed's decision as good news alongside a rise in unemployment to 3.9% and nonfarm payrolls of 150k coming in below consensus. October's jobs report revealed a meaningful cooling in the Technology and Manufacturing sectors as both sectors shed jobs. As a result, longer maturity bond yields narrowed by an estimated 20 bps in anticipation of the FOMC normalizing their hawkish stance with the Bloomberg US Aggregate returning 2%.

To navigate these turbulent financial waters, we must focus on the sturdy bedrock of our economic landscape. With the FOMC's latest decision in the rearview mirror, the road ahead depends on the ever-volatile bond yields and the tone of upcoming earnings announcements. Moreover, there's the impending Federal spending deadline of November 17, looming over us like a thunderstorm on a picnic day, threatening a government shutdown. So, keep your umbrellas ready. And remember, the next FOMC meeting isn't until December 13, so we have some time to master the art of economic patience.

"Today, we decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings. Given how far we have come, along with the uncertainties and risks we face, the Committee is proceeding carefully. We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks…

So, there's plenty of risk out there. But I would go back to the bigger picture from our standpoint is, we've got a very strong economy, strong labor market, making progress on labor market, making progress on inflation, and we're very focused on getting confident that we have achieved a stance of monetary policy that is sufficiently restrictive. That's really our focus."

 – Chair Powell's FOMC Press Conference, November 1, 2023.

WFH Capital of America – San Francisco

San Francisco Skyline

San Francisco, a city steeped in history and innovation, has been known for many unique features. It's been the City of Fog, celebrated for its iconic cable cars and the stunning Golden Gate Bridge, and even played a pivotal role in the California Gold Rush. It earned its stripes as the Capital of California Cuisine, became a global tech hub, and is now proudly home to the Golden State Warriors. But, in the wake of the COVID-19 pandemic, a new moniker has emerged – the Work-From-Home (WFH) capital of America. You see, in the age of remote work, leaving the city no longer means leaving your job.

The consequences of this WFH trend have left a noticeable mark on San Francisco's downtown landscape, where over 30 million square feet of office space now stands vacant. It's a stark departure from the pre-pandemic days when office vacancy rates averaged a modest 5%. As of the most recent data reported by CBRE Research in Q3 2023, that rate has skyrocketed to a staggering 34%. This high vacancy rate puts San Francisco in a unique and dire position, setting it apart from other major metropolitan areas in the United States, as the national average office vacancy rate is lower at 19.4%. By comparison, New York's Manhattan averaged a 9% office vacancy rate before the pandemic and currently is at 22.1%.

The repercussions of this shift are far-reaching. The city's tax revenue, budget, retail businesses, the small enterprises it supports, not to mention the housing ecosystem for its workers, are all hanging in the balance. A decline in office space translates into a decline in revenue, effectively transforming the urban landscape into a potential economic zombie town – a situation nobody wishes to entertain.

San Francisco's current mayor is eyeing a solution to tackle the city's housing shortage and the need for low-income housing. One approach being considered is the conversion of some office buildings into apartments. However, here lies the challenge; experts estimate that only around 10% of San Francisco's office space is convertible into residential units.

The key lies in the ability to reinvent this redundant office space creatively. But can this transition generate tax revenue and fulfill the city's socio-economic requirements? That's a puzzle that's yet to be pieced together.

There are inklings of hope with the rise of the artificial intelligence sector, ushering in new companies and potentially the need for office spaces. But the real question is whether this AI boom will generate more jobs in the long run or merely replace existing ones, maintaining the demand for office space in the city's future – thus perpetuating the urban doom loop.

As the story unfolds, San Francisco faces the daunting task of resolving its empty office space predicament, all while navigating an economic slowdown and observing other cities recovering more swiftly in the post-pandemic landscape. The longer this issue persists, the quicker it risks setting off a domino effect within the urban fabric – a true urban doom loop that no one can afford to ignore.

Economic Reports Nov 6-10, 2023
Select Indices as of Nov 3, 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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