Barely detectable at first, market interpretation of the world around us appears to have changed just enough. Enough to change my recent declaration placing domestic U.S. equity markets in correction? Not yet. Let's square that thought away.
One, even if there is the resumption of a bull market trend from this point on into eternity, equity markets have been in correction for a month. Nothing short of time travel changes that. Two, events now taking place have certainly blunted bearish sentiment, but until we know more, the very real possibility exists that in exchange for a softer landing now, we have traded for an elongated period of volatility. Regardless, when you find a twenty dollar bill in an old jacket pocket, the event does not impact one's standard of living, but certainly does positively impact personal sentiment for the time being.
Treasury Secretary Janet Yellen has stood on her head for weeks, maybe months, warning of the potential for a U.S. default, and the risks associated with failing to meet national financial obligations. Key private sector leaders, such as JPMorgan Chase's ( JPM) Jamie Dimon put the words "recession" and "complete catastrophe" in the thought cloud with the idea of such an avoidable misstep as President Biden put together a group of business leaders in an attempt to convince a nation, but mostly those employed in our legislature, that maybe something could or should be done about the debt limit. Hopefully, prior to the nation running out of flexibility or cash as soon as Oct. 18. Citibank's ( C) Jane Fraser termed such legislative behavior as "playing with fire."
Large-cap U.S. equity indexes bottomed for the day about half an hour into the regular trading session. Quite importantly, from a technical perspective, this event occurred above Monday's lows for both the S&P 500 as well as the Nasdaq Composite. The action was in no way "clean," but as the session wore on, keyword-reading algorithms would jerk higher twice more after that bottom, after 13:00 ET and at about twenty minutes prior to the closing bell.
Losers beat winners at both the NYSE as well as the Nasdaq as investors pressured mid-to small-cap stocks in a shift toward favoring the oddball combination of large-cap tech, the transports (led by the rails and the truckers), and defensive sectors as Treasury yields relaxed, at the short end of the curve in particular.
Interestingly, while declining volume bested advancing volume at the NYSE, the opposite was true up in midtown and decisively so. Aggregate trading volume increased for both NYSE and Nasdaq-listed names, as well as for constituent membership in both the S&P 500 and the Nasdaq Composite.
In plain English, there appeared to be at least some professional participation in a burgeoning reallocation toward large-caps, toward software, toward the semis, and away from the financial and energy sectors.
What Gives?
Of course, overtures made by Senate minority leader Mitch McConnell toward his Democratic colleagues are the headline, but before we even get to that place, there is more to understand. First, on Tuesday evening, President Biden appeared to show if not support for, then at least confidence in Fed Chair Jerome Powell. While I think (this is opinion) that Powell has been outstanding in his position since the start of the pandemic, recent allegations of less-than-appropriate investment behavior by several key Federal Reserve officials on his watch, have lent ammunition to the far left of the Democratic party, led by Senator Elizabeth Warren, who would like to see a change at the top of the central bank.
This is the deal. Yes, President Trump replaced former Chair (Now Treasury Secretary) Yellen with Jerome Powell in what was an overtly partisan move. The fact remains however, that Yellen and Powell appear to work well together, have great respect for each other, and in Powell, the president has a largely apolitical Republican in a key position, where he can give the impression of reaching across the aisle without it coming back to haunt him politically. And don't forget, President Trump may have nominated Powell to the Chair, but it was President Obama who nominated Powell to the Board of Governors in the first place.
Markets did breathe a sigh of relief on this matter, and (again, my opinion) changing leadership that has been quite obviously both careful and competent prior to exiting a national/global crisis would only increase the perception of potential risk.
Then...
Early on Wednesday, it became increasingly apparent that Gazprom, Russia's state-owned energy company, would do what it could (or at least say so) to relieve natural gas shortages across Europe, while U.S. Energy Secretary Jennifer Granholm at least messaged to the media that the U.S. could release crude from the national strategic oil reserve in an effort to prevent spiking natural gas prices from pulling energy prices in general in that direction.
Finally...
Not an actual breakthrough, but a chance at a minor, temporary breakthrough. The already mentioned Senator McConnell offered or appeared to offer support for a short-term extension of the nation's debt ceiling as an option to resolve a fiscal standoff that could render the U.S. incapable of servicing its national debt by Oct. 18. This overture was the first sign that Senate Republicans were willing to take action in order to allow more time for either negotiation over the larger of two fiscal packages still up in the air that would require broad changes to national tax schedules, or for Democrats to avoid a Republican filibuster and pass a more permanent extension or suspension of said debt ceiling and then pass their fiscal spending framework also on their own. From a Republican perspective, Democrats will own the consequences of both.
Without a lot of detail available, it appears that McConnell's proposal delays this fiscal "cliff," allowing for federal spending to continue uninterrupted until Dec. 3. This gives both House and Senate Democrats who have not been of one mind on the size, or the duration of the pending social and climate-based spending package more time to get at least their ducks in a row. While some on the far left appeared ready to gloat over what was in their view a Republican submission, the far more pragmatic Senate majority leader Chuck Schumer merely stated "We're making good progress" and inferred his hope for an agreement by (Thursday) morning.
This particular item is the driver for the short-term change in market sentiment. My concern is that through pushing back this potential default six weeks or so, the periods of heightened risk to the underlying economy and by extension the financial markets are now elongated. Capital would normally move back into equities by November for a push into year's end. How much this threatens the curve of that typical behavior, I can not be sure of at this time.
The solution for now, may be to trade the market more than to invest in it, as there will be volatility during a time of year when at least those managers that have had good years are trying to wind down their activity for the year without screwing up their performance, and thus, their compensation.
In other words, volatility could spike in late November/early December just as liquidity walks away. Keep that in mind.
In Addition
We have covered in some detail, not only the slowing Chinese economy, and fragile Chinese real estate markets, but also hostile Chinese posturing toward Taiwan, Japan, South Korea, Australia and even the U.S. and Canada. On Wednesday, in Zurich, U.S. national security advisor Jake Sullivan and his Chinese counterpart, Yang Jiechi, reached an agreement for Presidents Biden and Xi to hold a virtual summit before the end of the year.
While in terms of defrosting tensions between superpowers, that may seem a bit tepid, the U.S. Navy was busy being visible cooperating with allies in a joint military exercise taking place in the Asia/Pacific region. Seventeen vessels, including four aircraft carriers representing the U.S., U.K., Japanese, Netherlands, Canadian, and New Zealand navies participated in the drill.
Just an aside, two U.S. Marine Corps F-35 fighter aircraft landed on and took off from a Japanese Navy helicopter carrier. While illustrating the ability of the F-35 to successfully conduct both short takeoffs and vertical landings, it also expresses the willingness of the Japanese Navy to modify its IZUMO class helicopter carriers (24K ton) to conduct fixed-wing naval combat operations, something Japan has avoided since World War II. By the way, Japan is a major participant in Lockheed Martin's ( LMT) F-35 program. Wonder why? Rock and Roll.
Market Notes
1) Nvidia ( NVDA) has apparently offered the EU concessions left undetailed in hopes of securing antitrust approval for Jensen Huang's tentative $54B acquisition of U.K. chip designer Arm Holdings. The EU competition authority has set Oct. 27 as the deadline for a decision. I remain long with a $250 price target.
2) Moderna ( MRNA) has weakened significantly over the past three weeks, going into today's (Thursday) oral arguments before the U.S. Court of Appeals for the Federal Circuit. Subsidiary ModernaTX is seeking to invalidate two patents belonging to Arbutus Biopharma ( ABUS) . Analysts expect Arbutus to come out on top, and the most likely outcome could be some kind of royalties-based settlement. Is Moderna a "buy" after any outcome today? Let's see where Europe goes with their concerns over the Covid-19 vaccine for teens. There is still a gap to fill higher for this name. That said, the 200-day simple moving average (SMA) is still $73 south of Wednesday's closing price. I think I'll wait before getting back into this one. I executed the final step in my exit from the name quite poorly. At least the final tranche was tiny relative to the entirety of the position on the whole over more than 18 months. I have that.
3) Euphoria over Palantir's ( PLTR) $823M U.S. Army intelligence contract award on Tuesday evening wore off as Wednesday wore on. William Blair analyst Kamil Mielczarek, who rates PLTR at "underperform," pointed out that the White House budget plan requested only $92.6M for that specific program for fiscal year 2022, and only about $22M of that $92.6M has been designated for software. Looks like, if true, the White House and the Army need to talk. I sold nothing on Wednesday. My price target remains $32 for now.
4) The BNPL (buy now, pay later) trend continues for retailers. Affirm ( AFRM) was already working with Walmart ( WMT) and had recently teamed up with Amazon ( AMZN) to provide this service which is quite popular with younger (Gen Z and Millennial) consumers. On Wednesday, Affirm added Target ( TGT) to its stable ahead of the holiday season. Now, if someone can just unload some of the ships lined up at U.S. ports.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 347K, Last 362K.
08:30 - Continuing Claims (Weekly): Last 2.802M.
10:30 - Natural Gas Inventories (Weekly): Last +88B cf.
15:00 - Consumer Credit (Aug): Last $17B.
The Fed (All Times Eastern)
08:30 - Speaker: New York Fed Pres. John Williams.
