David Alan Carter
Got Legs? After the U.S. economy shrank in the most recent back-to-back quarters (by some measures, the very definition of a recession), new data in October showed the GDP grew in the third quarter by 2.6% from a year earlier. That was certainly welcome news, as was the shrinking trade deficit and a job market that remains strong.
While we’re on the topic of good news, consumers expect the inflation rate a year from now to be 5.4%, the lowest number in a year and a decline from 5.75% in August, according to the latest New York Fed Survey of Consumer Expectations.
While we’re on the topic of good news, consumers expect the inflation rate a year from now to be 5.4%, the lowest number in a year and a decline from 5.75% in August, according to the latest New York Fed Survey of Consumer Expectations.
Some economists may beg to differ, and just expecting something doesn’t make it real. But the “experts” have been wrong any number of times and consumers have been keeping this ship afloat, so we’ll give them their due.
The Market
One month after September’s shellacking when stocks fell 9.3%, all three major indices managed to print monthly green by Halloween - despite a tough time for a number of key tech stocks. In the closing week of October, investors cheered Apple’s third-quarter earnings, buoying the market even as Alphabet (formerly Google), Amazon, Microsoft, and Meta (formerly Facebook) all posted disappointing quarterly results. Meta in particular plunging 24% on October 27 to a price level not seen since 2016.
Does this market rally have legs? Maybe, maybe not. First off, let’s call this what it is – a bear market rally. The S&P 500, Nasdaq, and Dow Jones Industrial Average remain mired in bear markets. Bear markets are known for sharp bounces, such as the rebound that took the S&P 500 up more than 17% from its mid-June low before sliding back down to set a new 2022 low just 19 days ago, on October 12.
Among the arguments for more room to run, corporate earnings. In aggregate, companies are reporting earnings 5.4% above expectations. Yes, many of those are lowered expectations, but a beat is a beat. With roughly three-quarters of S&P 500 firms yet to post, some market technicians see room for further upside in this rally.
But let’s not forget: we’re still in the grip of the bear and a deteriorating global economy. It’s going to take some time to work our way out of this, and rallies will come and go during the process.
Upcoming
And For What It’s Worth…
Big news regarding Horizon Worlds, Meta’s virtual reality platform that lets users create and visit “worlds” with friends or strangers. At long last and after sinking over $15 billion into its metaverse project since the start of last year, CEO Mark Zuckerberg announced that developers have solved the problem of giving avatars… legs. That’s right, avatars - which were previously floating torsos with arms and heads - will now have legs and feet. In a demonstration video, Zuckerberg’s avatar is shown jumping for joy on newfound legs and feet.
It remains to be seen whether this opens the floodgates to Horizon Worlds. So far the platform is notable for its emptiness, with the Wall Street Journal reporting that most users quit within a month. Even Meta employees weren’t using it. Zuckerberg has proven critics wrong in the past, so perhaps it’s too soon to tell whether this metaverse thing will be boon or bust. But still…
Oh – and about that demonstration video. Turns out the jumping segment featured “animations created from motion capture.” Translation: Hollywood trickery. Oops.
The Market
One month after September’s shellacking when stocks fell 9.3%, all three major indices managed to print monthly green by Halloween - despite a tough time for a number of key tech stocks. In the closing week of October, investors cheered Apple’s third-quarter earnings, buoying the market even as Alphabet (formerly Google), Amazon, Microsoft, and Meta (formerly Facebook) all posted disappointing quarterly results. Meta in particular plunging 24% on October 27 to a price level not seen since 2016.
Does this market rally have legs? Maybe, maybe not. First off, let’s call this what it is – a bear market rally. The S&P 500, Nasdaq, and Dow Jones Industrial Average remain mired in bear markets. Bear markets are known for sharp bounces, such as the rebound that took the S&P 500 up more than 17% from its mid-June low before sliding back down to set a new 2022 low just 19 days ago, on October 12.
Among the arguments for more room to run, corporate earnings. In aggregate, companies are reporting earnings 5.4% above expectations. Yes, many of those are lowered expectations, but a beat is a beat. With roughly three-quarters of S&P 500 firms yet to post, some market technicians see room for further upside in this rally.
But let’s not forget: we’re still in the grip of the bear and a deteriorating global economy. It’s going to take some time to work our way out of this, and rallies will come and go during the process.
Upcoming
- Right off the bat in November, Wall Street’s attention turns to the Federal Reserve, with the latest FOMC meeting this Tuesday and Wednesday. The expectation is for another 0.75% rate hike, the fourth “jumbo” hike this year. Beyond that lies uncertainty. Will the Fed take a pause in coming months and reevaluate? Or keep pressing the pedal to the metal? Stay tuned.
- The Labor Department’s October jobs report is due out on Friday morning.
- Midterm U.S. elections, which will determine which party controls the U.S. House and Senate, are slated to take place November 8.
And For What It’s Worth…
Big news regarding Horizon Worlds, Meta’s virtual reality platform that lets users create and visit “worlds” with friends or strangers. At long last and after sinking over $15 billion into its metaverse project since the start of last year, CEO Mark Zuckerberg announced that developers have solved the problem of giving avatars… legs. That’s right, avatars - which were previously floating torsos with arms and heads - will now have legs and feet. In a demonstration video, Zuckerberg’s avatar is shown jumping for joy on newfound legs and feet.
It remains to be seen whether this opens the floodgates to Horizon Worlds. So far the platform is notable for its emptiness, with the Wall Street Journal reporting that most users quit within a month. Even Meta employees weren’t using it. Zuckerberg has proven critics wrong in the past, so perhaps it’s too soon to tell whether this metaverse thing will be boon or bust. But still…
Oh – and about that demonstration video. Turns out the jumping segment featured “animations created from motion capture.” Translation: Hollywood trickery. Oops.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember - especially now - that protection* remains paramount.
Best always,
David
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* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can also mean a significant position in a model built for protection. For example, the new Zen Knuckle with its volatility hedge. Or Bond Bulls and/or The 12% Solution, as they both have sensitive cash triggers, and can switch between different bond funds.
It can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or the new Zen Knuckle and pretty much anything else.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Protection can mean keeping an eye on the provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management. Read more on the Investopedia page for Stop-Loss Orders.
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