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Weekly Market Update for October 27, 2023

by Jim Ulland

When is good news not good enough? Apparently, this week. For example, Meta (Facebook) announced Q3 earnings. Operating income was 20% higher than expected. Revenues were 23% higher than last year and above expectations. With all this good news, the stock went down 4% for the week. Alphabet (Google) was virtually the same story. Google’s ad business was up 11% in Q3 vs up 5% in Q2. The sale of advertising is 90% of the company’s revenue. The data storage “Cloud” business was up 22% over last year, but up less than the 28% increase of Q2. Thus, 90% of Google’s business was up more than expected and 10% of its business was up less than expected. The stock ended down 10% for the week. Not good enough.

The market has plenty to worry about, which is one reason for the tepid response to good news. The chief concern is that the Israel-Hamas war will draw Iran into the conflict. If Iran attacks Israel, the US is likely to attack Iran, which is thought to have nuclear weapons. Iran’s population is 88 million, whereas Israel’s is 9 million. A second big concern is that the US government deficit will keep inflation from trending down and thus force the Fed to raise interest rates further to slow the economy and inflation. This year’s deficit is the third largest in history. Funding the deficit is expensive. During the week, the 10-year Treasury yield hit 5%, the highest level since 2007. This has driven 30-year mortgages to as much as 8% and credit card interest to 22.8%. These high rates raise the fear that the economy will slow markedly in this quarter and further in 2024 as the full impact of the interest rate increases becomes clear.

The market’s nervousness clouded other generally good corporate earnings, which were running, on average, above last year. GDP in Q3 was up a remarkable 4.9%, the strongest since the end of 2021. Even the UAW provided good news with a tentative settlement with Ford, allowing the workers to return to work even before the vote on the new contract. On 11/1/23 there should be more good news as the Fed meets and is expected to leave interest rates unchanged. News that is less certain to be positive comes next Friday 11/3 when the number of new jobs created in October is announced. A large number of new jobs will keep the labor market “tight” and prevent wage increases from moderating. Wages are an important component of inflation.

Amidst all these cross-currents, this week the S&P 500 was down -2.53% and the NASDAQ -2.63%. On Monday the S&P 500 was -0.17%, Tuesday +0.73%, Wednesday -1.43%, Thursday -1.18%, and Friday -0.48%. The yield on the 6-month Treasury closed at 5.54%. The 10-year Treasury finished down -8bps to 4.84%.

Next week, the significant economic news will be the Jobs Report on Friday, assuming the Fed leaves interest rates unchanged on 11/1. Geopolitically, Israel may move troops into Gaza depending somewhat on hostage negotiations. Q3 corporate earnings will continue. All of this will be bathed in volatility. Fasten your seatbelt.

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