The market has started off the 4th quarter hot. We’ve seen the S&P500 gain over 5.8% in two days. There are a few reasons I think this has happened. The first is that the 3rd quarter ended with a lot of hedge funds and private equity selling losers to make their holdings look better. The 3rd quarter was a slaughter for many.
Now the hedgies are back to buying to try to win back a quarter. Here’s what Jefferies Equity Research team sees their holdings as:
They continue to be short energy. While the indexes are still heavy on tech, hedge funds are underweight there. They are heaviest in communication services. This would be companies like google, meta, disney, t-mobile, verizon, at&t, netflix, ect.
In addition to the hedge funds pivoting, we’ve seen a lot of talk from globalists that the Fed needs to pivot soon. First the Fed had scheduled an “emergency” meeting. This was bandied about as the beginning of a pivot by the market perma-bulls. Then it was the United Nations calling on the Fed to change course. Now the IMF is calling on the Fed to “be mindful” of their “spillover impact”.
Georgieva called on the Fed to be extremely prudent in its policies and be mindful of the spillover impact on the rest of the world, adding its responsibility "is very high."
On top of all these factors, we are beginning to see employment rollover.
Job openings saw a big drop in August. We’ve got a lot more job data coming out this week. As the employment picture worsens, expect the Fed pivot talk to reach a fevered pitch. It should also continue to light a fire under the indexes. The problem is that the Fed is prepared for employment to go soft. The Fed has a singular mandate now and that mandate to is reduce inflation. This was made plainly obvious by NY Fed President John Williams yesterday in his speech in Arizona.
“To help rein in demand to levels consistent with supply—and therefore bring inflation down—monetary policy needs to do its job. The FOMC is taking strong actions toward that end.
At its most recent meeting, in September, the FOMC raised the target range of the federal funds rate to 3 to 3-1/4 percent, its fifth consecutive increase.4 And the Committee said it anticipates that ongoing increases will be appropriate.”
The next FOMC meeting is November 2nd. CME’s Fed Watch tool still shows a 69% chance of a 75 basis point increase at that meeting.
Back to Williams,
“As a result of slowing growth, I anticipate the unemployment rate will rise from its current level of 3.7 percent to around 4-1/2 percent by the end of 2023.”
“Tighter monetary policy has begun to cool demand and reduce inflationary pressures, but our job is not yet done. It will take time, but I am fully confident we will return to a sustained period of price stability.”
This does not sound like a man who is ready to sign off on a change of course in monetary policy because job openings have cooled off. Expect the market to continue to interpret the signs wrong and push higher.
What a time to be alive haha! Thanks for the excellent perspective, as always.