Powell’s Inflation Remarks and Political Uncertainties: Volatility Remains

The stock market experienced a decline on Thursday, ending its longest period of gains since 2021. Investors were spooked by comments from Federal Reserve Chair Jerome Powell, who expressed doubts about the adequacy of efforts to curb inflation and hinted that interest rates might remain high until at least early 2025. Moreover, looming concerns over the U.S. government’s debt and Senator Manchin’s decision not to seek re-election have added to the market’s uncertainties.

Despite the Federal Reserve’s stringent stance, several factors offer a positive outlook for the market. The economy demonstrates remarkable resilience. Consumer confidence is robust, and corporate earnings have mostly been stable or exceeded expectations. The market appears to be adapting to the Fed’s tightening measures, fostering hope for a ‘soft landing’.

The potential for a government shutdown looms over the market, with increasing partisanship in Washington contributing to this uncertainty. A growing concern is the diminishing savings of consumers and their increased reliance on credit, which could impact the economy. While home sales are decelerating, there remains a consistent buyer presence.

A specific area of concern is the ‘Magnificent 7’ – seven major tech stocks significantly influencing the market. These stocks now comprise 29% of the S&P 500, nearing their historical peak. This high concentration suggests increased market vulnerability to shocks.

Looking ahead, our strategy is characterized by careful, deliberate discipline, focusing on value and quality over rapid growth.  Stock outside of the Mag 7 have some favorable valuations.  Avoiding the temptation for quick gains, we aim to prevent significant losses, prioritizing wealth preservation and steady growth. With healthy dividend yields, we can afford to be patient in our investment approach.

Key Aspects Today:

• Performance of the ‘Magnificent 7’: Continued sell-off in these stocks could negatively impact the overall market.
• Responses from Other Stocks: A shift from investors away from the ‘Magnificent 7’ could benefit other market sectors.
• Economic Data Releases: Upcoming economic data could significantly influence the market.

Caution is urged in the current market environment, there remain opportunities for investors who are diligent in their research and willing to take calculated risks.  We view this as an opportunity to build positions in quality value stocks with a history of dividends.  Staying focused on the long-term is usually the most prudent strategy. 

Key Points:

• Fed’s hawkish stance: The Fed is expected to continue raising interest rates in an effort to combat inflation. This could have a negative impact on economic growth and stock prices.
• Concentration of the market in the Mag 7: The Mag 7 (AAPL, AMZN, GOOGL, META, MSFT, NVDA, and TSLA) now account for 29% of the S&P 500. This means that the market is becoming increasingly concentrated, which could make it more vulnerable to shocks.
• Impending debt issue: The US government is facing a $31.4 trillion debt ceiling, which it must raise by December 15th to avoid a default. If the debt ceiling is not raised, it could lead to a government shutdown and economic uncertainty.
• Partisanship in Washington: The increasing partisanship in Washington could make it more difficult to address the debt ceiling issue and other important economic challenges. This could add to the uncertainty in the market.
• Consumers running out of savings and utilizing credit more: This could have a negative impact on consumer spending and economic growth as consumer struggle with higher debt and interest rates.
• Home sales slowing:  There are signs that the housing market is cooling off, which will have a negative impact on the economy.  However, the housing market is still strong despite higher interest rates.