Frightening Headlines

Market Resilience Amid Fear-Driven Headlines

Investors were subjected to the usual fear inducing headlines in October, yet stock prices advanced anyway. Whether it was Jamie Dimon’s colorful remark likening banks to cockroaches, where a single bad loan is never an isolated event, or to a Challenger Grey and Christmas report highlighting the largest surge in layoffs in 22 years, investors were able to ignore the noise and remain focused on the underlying signal. One hot topic this month was whether the stock market is in a bubble. Nonetheless, quarterly corporate earnings report season revealed that profits performed far better than expected, with about 85% of companies beating expectations, which helps account for and justifies the rise in stock prices. It appears fearmongering doesn’t pay, while investing does.

Economic Data During the Government Shutdown

Tracking the economy is a bit more difficult these days, since government reports are unavailable during the shutdown. So, we are more reliant on reports issued by the private sector. But there are plenty of those and some are quite dependable. On the unreliable side, headlines suggested that the Challenger report showed the highest level of layoffs in 22 years. A more accurate reading indicated these were the highest layoffs for the month of October in 22 years. By the way, this report is extremely volatile month to month, its track record is one of inaccuracy and it was the outlier insofar as hiring is concerned. More positively, using publicly available data on unemployment insurance claims issued by various states, the private sector has been able to supply estimates for the broader economy, which reveal that such claims remain near recent lows. That was the more insightful revelation. ADP reports also suggest a pickup in hiring. Positive or neutral reports on hiring were also released by the Chicago Fed, Revelio Labs, and the Bank of America Institute.

Housing and Growth Indicators Remain Stable

Nothing striking appears to be a concern in the housing sector, where many reports on sales, mortgage applications and construction activity are being released normally without signs of falling activity. PMI reports have also improved. The Atlanta Fed’s GDP Now estimate points to 4% growth in Q4. Despite an ongoing government shutdown-the longest ever-what data we get continues to suggest that the expansion just keeps rolling along.

Tariffs, Trade, and Policy Uncertainty

What are the looming concerns? The government shutdown is certainly one, although it is likely to be settled fairly soon. Flight cancellations will pressure Congress to reopen the government. The tariff issue is far more uncertain. The Supreme Court will determine its legality, but even if it rules against the tariffs, it is very likely that the Administration resets tariffs under different laws, while it continues to negotiate new tariffs and new trade relations with other countries. The deals that are struck will vary considerably with each country. In the meantime, business must cope with on again-off again tariff rules and uncertainty. And firms must also make investment decisions, including how much production can or should be relocated and where. So far, this uncertainty has had only relatively modest effects, perhaps because the case for AI investment is so compelling, it dominates other considerations.

The Federal Reserve and Interest Rate Outlook

One of the more significant uncertainties concerns monetary policy. The Administration wants the Fed to bring down interest rates, and at least a few Fed officials agree. However, a number of other Fed officials see inflation as remaining stubbornly close to 3%, so they are reluctant to support any additional rate reductions until either inflation comes down or economic growth weakens to the point unemployment increases. We see neither of these conditions being met, so we expect policy to pause to await a compelling change in the state of the economy. So, the market will likely see changes in monetary policy as uncertain and those views will likely change each month in response to new data and other developments.

Staying the Course: Why Market Momentum Persists

Investing is always inherently uncertain, since it is always about the future. I love the Yogi Berra line, “Forecasting is difficult, especially when you try to forecast the future.” (This line is also attributed to Neils Bohr.) But the economy is huge and diverse, so it has plenty of momentum behind it. That means it is most likely to continue on its prevailing path unless something comes along that is large and disruptive. These are infrequently expected or understood events. Households and businesses are highly adaptive and can modify behavior to cope with foreseeable developments. Surprises are inherently more disruptive and are, by definition, unexpected by the market. So, most of the time, the safest and best course is to expect the economy and the markets to just roll along, which is precisely what’s been happening.

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