CWS Market Review – October 31, 2023

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Expect the Fed to Pause Again

The Federal Reserve is meeting today and tomorrow. The central bank’s policy statement will be released tomorrow afternoon at 2 pm.

I’ll ruin the suspense for you. The Fed won’t make any changes to interest rates. The FOMC will keep its target for Fed funds rates at 5.25% to 5.50%. The good news is that inflation has faded from its highest levels. The bad news is that the battle isn’t over. Not yet, at least.

For tomorrow, traders currently think there’s a 0% chance that the Fed will hike rates and a 2.9% chance that it will lower rates. In my opinion, they’re right on the odds for a rate hike, and roughly 2.89999% too high on the odds for a rate cut.

Here’s a look at the Fed funds rate over the last 20 years:

This chart shows you how dramatic the Fed’s policy has been over the last 18 months.

The real news from this meeting will be any signal from the Fed about where rates are headed and when. This is where things get interesting because the Fed has said that it expects to raise rates once more time before the end of the year. After this week’s meeting, there’s only one more meeting scheduled for 2023, and that’s on December 13.

Still, traders are betting against a December hike as well. According to the futures prices, traders think there’s a 29% chance that the Fed will hike rates in December. That’s unusual that the market is so doubtful of what the Fed has said publicly. As a general rule, whenever there’s a disagreement between government officials and the market, I go with what the market has to say. After all, market participants suffer if they’re wrong.

The U.S. economy is still in a positive mood, but there are ominous clouds in the distance. Let’s start with some good news. Last week, the government said that the economy grew in real, annualized terms of 4.9% for Q3.

That’s quite good and it topped Wall Street’s forecast for growth of 4.7%. That’s the highest growth rate since Q4 of 2021. During Q2 of this year, the economy grew by 2.1%. The Q3 report will be updated again in November and then again in December.

Consumer Spending Is Powering the Economy

What’s driving the buoyent economy? That’s simple. It’s been the consumer. Despite higher interest rates, folks are still heading to the malls and buying stuff. The economy was also helped by higher inventories, exports and government spending.

Personal consumption expenditures, which is a fancy name for consumer spending, rose by 5% in Q3. That’s up from 0.8% in Q2. Consumer spending was roughly evenly divided between goods and services.

These good numbers aren’t a surprise to anyone who’s been following the bond market. In less than six months, the yield on the 10-year Treasury has jumped by 150 basis points. That’s a very large move for such a short period of time.

It’s not just GDP. We also had good news in last Thursday’s report on durable goods. For September, orders for durable goods rose by 4.7%. Wall Street had been expecting an increase of just 2%. In August, durable goods orders were up by just 0.1%. For now, there’s no recession in sight, but that may change soon.

Now let’s look at some of the bad news. One area of concern has been the stock market. On Friday, the S&P 500 fell for the eighth time in nine sessions. The index closed at its lowest level since May 24.

This is another area where higher interest rates are taking their toll. Higher rates may not be scaring off consumers just yet, but they do have an impact on the financial markets. There are plenty of investors who are fine with sitting out this market and taking a 5.44% risk-free profit for the next twelve months. It’s not how I feel, but I certainly understand the temptation.

The important fact for investors to understand is that higher interest rates are like Kryptonite for stocks. Even the perception of higher rates can scare off stock investors.

Measuring from its recent peak on July 31, the stock market lost slightly more than 10%. Share prices rebounded a bit yesterday and today. Still, October was the third down month in a row for the S&P 500.

For now, the interest-rate outlook is unfavorable, but that could change very soon. It’s very possible that the Fed may start cutting rates sometime in 2024. That could help spark a nice rally for stocks.

Put it this way. The NBA season just got started. It’s possible that the Fed may start cutting rates before the playoffs are over in June of next year.

The next big test for the market comes on Friday when the government releases the October jobs report. The labor market has been remarkably resilient. It’s as if people have been waiting in desperation for cracks to show in hiring. They haven’t appeared.

Last week’s report on initial claims was quite good. The Labor Department said that jobless claims rose by 10,000 to reach 210,000 for the week ending on October 21.

For this Friday, the consensus on Wall Street is for a gain of 170,000 net new jobs. A big miss could have a dramatic impact on the stock market.

The Long Run at Clorox

Consumer staples stocks have not performed well this year. That’s a reflection of the market shying away from conservative, stable stocks, and its willingness to take on more risk.

One of my favorite consumer staples stocks is Clorox (CLX). The stock has been an outstanding performer for several decades. That’s why I take notice when the shares have been weak. Yesterday, Clorox made a new 52-week low.

People often assume that Clorox is owned by someone else. Nope. It’s owned by Clorox. The company also owns Pine-Sol and Liquid-Plumr.

The stock got a nice bump early on during the pandemic, for obvious reasons, but it’s been sluggish ever since

As it turns out, Clorox is due to report its fiscal-Q1 earnings tomorrow. The company’s fiscal year ends in June.

Clorox is going through a rough stretch which includes a recent cyberattack. For Q1, Clorox is expecting to report between a loss of 40 cents per share and flat earnings. Wall Street expects Clorox to report a loss of 22 cents per share.

One of the easiest strategies on Wall Street is to wait for a good company to drive off the road into a ditch. It happens to everybody. The difference is that the high-quality companies can right themselves.

For now, I’m steering clear of Clorox, but I’m keeping a close eye on it. If the problems are fixable, this could be a potential turnaround play. Bear in mind what a solid company this has been. Clorox has increased its dividend every year for the last 21 years in a row.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.