How to Cut Through the Market Noise
If you just read the headlines last week (Iranian rocket attacks on Israel, oil surging, Powell hawkish) you would be forgiven if you expected stocks to be sharply lower, but that did not happen because the core underpinnings of this rally remain in place. That distinction is very important because there is a lot of noise out there right now (and it’s going to stay that way especially with the election less than a month away).
The best way to cut through that noise and not get distracted by scary/worrisome headlines is to stay focused on the key drivers of this market:
1) Economic soft landing
2) Fed rate cuts
3) Stable earnings
As long as news regarding those items stays positive, stocks will remain resilient. To that point, data was “good” to “good enough” on each of those three fronts to allow investors to look past scary geopolitical headlines.
On economic data, last week was important as it contained the three biggest monthly economic reports (jobs report, ISM Manufacturing, ISM Services). And while none of them were perfect, in aggregate they all pointed to a continued soft landing. Stable economic growth remains, by far, the most important influence on this market and as long as growth is solid, that’s a major support for stocks even at these lofty valuations.
On the Fed, market expectations are volatile as investors consistently talk themselves into a more dovish Fed, but it’s a trap to get caught up in that. The best-case scenario for investors is consistent but measured rate cuts that support stable growth. That’s two more 25-bps rate cuts this year in November and December. And that’s what Powell (and other Fed members) reiterated last week. So, while some investors may have been disappointed the Fed likely won’t cut 75 bps between now and yearend, it’s much better to have solid growth and measured Fed rate cuts (which is what we got last week).
Finally, earnings remain mixed (NKE wasn’t good last week) but they simply aren’t bad enough to offset solid growth or Fed rate cuts. Looking forward, earnings will be a much bigger focus of markets over the next three weeks and the key here is guidance. Unless earnings guidance is much worse than expected and is so bad it offsets the positives of solid growth and rate cuts, earnings are unlikely to cause a pullback.
Please, don’t confuse this analysis with me being an enthusiastic bull. This market still is very, very vulnerable to any negative news on growth and material deterioration in geopolitics or earnings. And a 5% pullback on any legitimate bad news isn’t just likely, we should all be prepared for it because it’s entirely possible. However, that bad news has to happen for any pullback to occur and right now it’s simply not. As long as growth data is solid, the Fed cuts rates and earnings stay mostly stable, then stocks will be able to hold these gains and continue the grind higher.
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