For the week ending 9/29/23

What Happened: Markets fell in September with the S&P dropping 4.9% and the NASDAQ dropping 5.8%.
 
What does it mean: After a strong start to the year, equities in general fell for the month of September. The root cause seemed to be the fear of the Fed’s ‘higher for longer’ interest rate position against the backdrop of deteriorating economic data.
 
Why do we care? Sometimes this is overly obvious such as not enjoying losing money. That said, we view the pullback in equities not as a signal of broader concern but rather a short-term opportunity. In our opinion, inflation has come down and will continue to come down quicker than most anticipate. Despite the rise in energy, most other inputs have continued their descent.
 
The final piece of the puzzle remains labor, which early indications suggest a softening in this area as well. Despite the Fed’s tough talk, we don’t believe further rate hikes will transpire and feel the eventual next step is a restart of the liquidity engines, whether the Fed likes it or not. In our opinion the pullback in stocks allows prudent entry ahead of what we feel will be an eventual lower rate environment and an election cycle that has every intention of improving market sentiment.
 

 
What Happened: Government shut down on the horizon?
 
What does it mean: Barring a last-minute deal, the US government will shut down operations on Sunday evening. The longest shutdown and most recent was December 21, 2018 through January 25, 2019, lasting 34 full days. Should the government shut down effective October 1st, all non-essential services would go unfunded while mandatory services such as Social Security and Medicare would continue to be paid. Side note, Congress will continue to be paid as well and I’ll let you form your own opinion about that.
 
Why do we care? At this point, in our opinion, not many investors seem overly concerned about the government shutdown. Since we’ve seen over 20 shutdowns lasting at least one full day over the last 40 years, we think investors understand how this will eventually play out. That said, the longer we have a government shut down, the longer the potential ripple effects could be within the overall economic environment. If it continues too long, we’ll look for market volatility to remain high.
 
What Happened: Hollywood Writes Strike Ends, UAW Strike Continues, Las Vegas Strike Begins
 
What does it mean: Unions are striking demanding higher wages for their members. Due to the shortage in labor, businesses are making concessions and deals are transpiring. The end result will be….job loss.
 
Why do we care? Most fail to understand the economics behind general supply and demand. If costs for a business escalate, those businesses are forced to raise prices to pass on the expense. At a certain point escalating prices will eliminate buyers. Sales will fall, inventory will build and businesses will be forced to eliminate expenses. What’s the highest expense for most businesses? Payroll.
 
In our opinion the movement to demand higher wages is not market moving one way or the other. In the short term this pressures prices on the inflationary side however eventually leads to an uptick in unemployment. The ebb and flow of prices, supply and demand are as old as time so we don’t see it as major influence over stock prices at this moment.
 
~ Until next time

Quint

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