Welcome to a new issue of Weekly Good Reads 5-1-1 by Marianne, a 25-year investment practitioner writing about investing, economy, wellness, and something new I learned in AI/productivity.
In this Weekly, I share insightful/essential readings, charts, and one term, incorporating some of my market observations and weekly change tables. I look beyond data and share something enlightening about life, health, technology, and the world around us 🌍!
Sharing the quote of the week:
Focus on what provides value to others, not what impresses others. ~ James Clear
With the US election imminently, one word to describe both the market and the US nation is anxiety! For example: in the hotly-contested swing state of Pennsylvania, the budget for operations and security has tripled to $40 million compared to 2019. The Conversation reminded us George Orwell’s “Ninety-Eighty-Four” is still relevant to this political moment.
The prediction markets, where users trade contracts to predict future events, show a very tight race (see chart above). But polls are not votes, and no prediction matters until all votes have been counted.
Another reason the market turned more volatile this past week was big tech earnings. Since its peak on July 10, 2024, the Magnificent 7 stocks as a group have trailed the performance of the S&P by almost 6% and by 11% vs. an equal-weighted S&P (proxied by the RSP ETF) even though the Mag-7 has returned 45% YTD (to November 1, 2024) vs. SPY (21.5%, and RSP, 13.1%).
While profits are still growing for the Mag-7 and their margins expanding, analysts have been cutting profit forecasts for 2025. These companies expect even higher capex spending on AI next year with still murky numbers for revenue and profits.
The US 2-year and 10-year government bond yields rose 10bp and 14bp respectively while the Treasury volatility index (MOVE) jumped 4 points this past week. The VIX index (stock volatility) also climbed 1.5% to 21.88% while the S&P fell 1.4% for the week. While S&P was down 0.9% last month, non-US markets such as Europe suffered much worse (in USD terms) at -5.7% partly due to the dollar strength.
The chart below from Datatrek simplifies this year’s dominant equity market driver—interest rate movement. As rates may continue to fall over the long term, large caps, led by big tech, may still be the preferred market, as these companies typically have high margins, cash buffers, and profit growth.
Source: Datatrek
As this WSJ article argues, no matter who wins the election, the next president will inherit a remarkable economy: Q3 GDP was at 2.8%, productivity growth for Q3 was 2% annualized, and September core PCE deflator was 2.3% (3m annualized, or 2.7% yoy). The higher productivity gain in the US (compared to a 10-year average of around 1.5%) was due to its ample energy supply and innovative prowess.
Having said this, despite the October unemployment rate being pretty much steady at 4.1%, the October nonfarm payrolls added only 12,000 jobs (thanks to Hurricanes Helene and Milton), strikes at Boeing, automakers, layoffs, etc.
The Fed is expected to continue with a 25bp rate cut (see Econ/Invest #3) as economic conditions warrant that move (inflation coming down, unemployment rising while real rates are too high, etc.); however, the Fed may refrain from talking about the rate path forward given the uncertain environment right after the US elections.
More uncertainty arises in Japan where the ruling coalition (LDP + Komeito) lost a simple majority recently in the lower house, raising the possibility of more stimulus for equities before the upper house election next July. The Bank of Japan stayed pat on interest rates in the recent monetary policy meeting.
China’s upcoming NPC on Nov 4-8 will be keenly watched to get clarity on their fiscal stimulus measures, which could depend on the US election results (who wins in the US has major implications on US trade policy). Reuters reported the Chinese authorities are contemplating approving the 10-trillion-yuan stimulus package to revive the fragile economy, first targeting the hidden local government debts.
In the UK, Chancellor Reeves has just announced her first budget. It was the biggest fiscal loosening in the UK for decades as spending increases will far exceed tax increases, thus loosening fiscal policy relative to the previous government’s plans, although fiscal policy still tightens over the next five years (the budget will tighten around 1.1% in real terms on average per year).
This coming week we will monitor the US Presidential elections on Tuesday, the FOMC rate decision and the press conference on Thursday, the Euro area October Composite PMI on Wednesday, September German industrial production on Thursday, the Bank of England monetary policy decision on Thursday, and China’s NPC standing committee meeting on Nov 4-8 as well as China’s October exports on Thursday.
However, analysts said the index had been unusually high relative to realised volatility — the actual swings that take place in stock markets — in recent months, even before Thursday’s jump.
The Vix “doesn’t look elevated, but if you compare it with realised volatility, it is very elevated . . . Implied vol is telling you the market perceives there to be plenty of risk,” said Binky Chadha, chief global strategist at Deutsche Bank.
As an anecdotal example, in a webcast with the team at Fidelity this week, we learned through their Portfolio Quick Check data that investors are heavily allocated to U.S. stocks. Domestic bias is real. About 30% of advisor portfolios, according to the data, have zero exposure to international stocks. That’s almost a third of portfolios (in this research’s sample) that have only U.S. stocks in their equity sleeve. All equity risk eggs are in one basket, and often, heavily tilted toward recently strong-performing large caps.
The American Heart Association sets a stricter limit of 6 percent of calories consumed — or no more than about 25 grams per day for women and 36 grams per day for men.
On average, people in the United States consume about 67 grams of added sugars per day..Nearly two-thirds of that amount comes from sugary drinks, sweet snacks, desserts and candy. But added sugars are also found in many packaged products like condiments, pasta sauces, sliced breads, granola and sweetened yogurts.
The bottom line: The Fed has not shied away from raising or cutting rates during an election year as mentioned by JP Morgan.
The Fed has shown some hesitancy about moving interest rates the two months before a November presidential vote, but for the rest of an election year, policymakers have historically done what they wanted to. Since 1956, the Fed has raised or lowered interest rates in every election year save one (2012).
The Fed is focused today on softly landing the economy without stalling growth, and it’s no small task. The pivot toward rate cuts requires careful navigation to ensure inflation continues to moderate and that growth doesn’t tip into recession.
One Term to Know: Trump vs. Harris Trades
The market has been moving the markets according to who they think will win in the US elections - hence the “Trump trades” or “Harris trades.”
According to Bloomberg, traders expect a stronger dollar and steeper yield curve if Trump wins, particularly if Republicans control Congress while the Harris trade is mainly that she can avoid a greater conflict with China.
We can monitor 6 key market indicators: when Harris leads, the Chinese Yuan (CNY), the Mexican Peso, and the US Treasury bonds may strengthen; when Trump leads, it will be the reverse plus the Dollar Index, Bitcoin, and gold prices may rise. Stay tuned to these charts on Bloomberg starting on November 5, Tuesday at 2 pm EST.
Having seen OpenAI enhancing its search capability with ChatGPT search, Google bringing its AI answers to map applications, now Meta is reportedly working on its AI-powered search engine. 🙌
