Weekly Stock Market Update & SPY Technical Analysis
Market activity is muted to kick off the fourth quarter as we head into earnings season. Earnings are always important, but they are especially important this time because:
It’s Q4 - the fourth quarter is historically a strong period for the market. The earnings data from the last period could help propel us into that position.
AI valuations are under pressure - companies have ballooned in valuations, which is fine, but only if earnings are strong enough to justify the prices and multiples.
Bond yields - stocks are also battling higher bond yields, which directly compete for investors’ capital. Higher yields also put upward pressure on interest rates, which can deteriorate a company’s future earnings forecasts.
Earnings will happen over the coming weeks, and the impact will be felt over the months that follow. Strong earnings can supercharge markets, but there are other variables that we have to consider going forward.
Geopolitical Unrest and the Stock Market
Many of the headwinds are caused by the ongoing feud over the Strait of Hormuz. The prolonged fighting has raised long term interest rates, caused inflation shocks, and has depressed certain parts of the economy and consumer confidence. The market was willing to overlook these systematic risks for a few months, but now we’re seeing the mood shift. Investors no longer seem to believe that the war is going to end soon, and quite frankly, the media is so mixed that it is hard to gauge where we are in the fight.
We’ve seen many reports over the past two weeks suggesting that the flow of oil out of the Strait of Hormuz is now returning to prewar levels, but oil prices don’t seem to be budging, nor are bond yields. The cost of premium to move oil is maintaining the higher costs, meanwhile all the borrowing from governments and companies is raising long term interest rates. It may take longer than just a week or two of “improving” flows for prices to settle and confidence to be restored. We’ll continue monitoring the latest tanker tracker reports for updates and manage accordingly.
The Latest on the Economy
Markets are digesting the latest labor market data, which showed that the U.S. unemployment rate ticked to 4.2% in September, just above the previous 4.1% reading. The economy added just 29k jobs last month, far below the 84k forecast. The implications for the stock market? Ironically, this might be good news. The Federal Reserve has been forced to keep monetary policy tight as inflation pressures returned, even raising interest rates in September. A weakening labor market changes that equation. The Fed has to balance inflation against employment, and the weaker the labor market becomes, the harder it becomes to justify continuing to raise rates.
But there’s a sweet spot to maintain…investors want the economy to cool enough that the Fed can stop tightening and eventually lower rates, but not so much that the slowdown turns into a recession and crushes corporate earnings. Right now, the September jobs report pushes the economy further toward that first scenario, but if employment continues deteriorating significantly from here, “bad news is good news” can very quickly turn into just bad news.
Major Market Indexes
Despite all of these headwinds, we haven't really seen what I would consider panic selling. The Dow and Russell 2000 have taken considerably more damage, while the S&P 500 and Nasdaq have remained relatively resilient because mega-cap technology and AI stocks continue to attract capital. Once that breadth closes and small caps, financials, and industrials start participating again, it could act as another bullish catalyst for the market.
We’re going into Q4 with confidence that earnings can eclipse the headwinds the market is facing. The AI boom is unprecedented…truly remarkable. Companies are posting massive year over year revenue increases with 50%+ profit margins. The market recognizes this, and this is why we’re not seeing any “panic” selling. We’ll continue to add into fundamentally strong companies that are highly relevant in their industries / sectors.