The Week Behind 

Despite what can only be characterized as a mega-cap meltdown, the major indices ended the week firmly in the green. Treasury yields and the USD behaved as weak earnings and economic data provided the first signs of definitive evidence FED policy is having the intended effect on the real economy, which fuels anticipation the FED may declare a small victory by lightening the intensity of their hawkish rhetoric and interest rate policy. The DOW, the “old economy” index, was the outperformer, adding 5.72%. Middle of the pack, the S&P, added ~4%. Lagging, but still positive, the NASDAQ, the “new economy” index, added 2.24%.  

Highlights

• For the first time this year, the manufacturing component of PMI came in below 50 at 49.9, indicating economic contraction. A meaningful sign FED tightening is slowing the economy. 
• Pultegroup (PHM), a homebuilder, reported a plunge in housing demand alongside a spike in deal cancellations. Management cites higher interest rates as the main culprit: a sign the FED has succeeded in cooling the housing market.
• A majority of mega-cap earnings, some of which reported misses on lowered estimates, indicated that FED tightening has finally caught up to earnings.   
• The US2YR, US10YR, and USD all ended the week lower, reacting to weak economic data and earnings. 

Markets Withstand The Mega-Cap Meltdown

Overall, mega-cap earnings left a lot to be desired. In some cases, management’s commentary was more disappointing than the quarter’s results. However, if you were to have told me that the S&P500, DOW, and NASDAQ would all end the week higher the same week any combination of the mega-caps ended the week ~5-20% lower, I would have assumed you were mistaken. Yet, that is exactly what happened. What does it mean?

There are a handful of theories materializing. One of which suggests that we are witnessing a change in market leadership. This often occurs as a bear market ends and a new bull market emerges. Typically, the leadership group changes from one bull market to the next. In the prior bull market, technology led. Markets went as technology went. What other companies in other sectors did was of little consequence. Last week, many of the biggest names in technology took a dive, but the markets took a step higher alongside healthcare, energy, and staples. Last week, markets went as other companies in other sectors went. What technology did was of little consequence. 

The Week Ahead

First week of November is a busy one for both the macro and the micro. 

With respect to the macro, the FOMC Meeting and October Nonfarm Payrolls are paramount. November’s FOMC Meeting is Wednesday. 75bps is expected. Conversation will focus on the evolution of policy as FED Funds nears their target and thoughts develop that using traditional measures of inflation – CPI and PCE – without consulting other sources will almost guarantee a FED-mandated recession. Payrolls release before the open on Friday. Last week’s positive price action was about more than a potential leadership shift. It was also predicated on the idea that the FED might take the mega-cap meltdown, contractionary PMIs, and homebuilder woes – meaningful evidence FED policy is now affecting the real economy – as a victory and become less hawkish in rhetoric and action. For now, payrolls is a “bad-news is good-news” report. If payrolls are light and suggests wages are flat, it would provide further meaningful evidence the FED is succeeding and can dial down the hawkishness. 

With respect to the micro, no shortage of well-known companies report. I’ll be watching quite a few of them to get updates on different segments of the economy. Broadly speaking, I want these companies to confirm for the FED what last week’s earnings and data suggested: tightening is starting to have an impact; you don’t need to be as aggressive.

New Leadership Does Not Mean Old Leadership Is Dead

In the second segment, I implied “other companies in other sectors” may take the mantle of market leadership from technology whenever the new bull market emerges. I’m beginning to believe it may be in healthcare. Clearly, the investment landscape is changing: interest rates, inflation, supply chain concerns, etc… The previous landscape blessed “growth at any cost”, which rewarded technology above all else. Now, a new landscape is forming. It provides an opportunity for profitable diversification. Technology still has a place in this new landscape. It is just not as big. So, it needs to get smaller to make space for the exciting opportunities the new landscape provides for selective bonds, financials, healthcare, energy, and staples.  

Let’s be clear. I do not think tech is dead. It is not that simple. A stock does not need to be in the leadership group to be a great investment. One of the headlines from last week was that the mega-caps had “slowed”. I prefer to use the word “matured”. It’s more accurate. They’re still growing at rates that companies in any other sector would envy. Quality-technology can still be a good investment. They still deserve a place in a portfolio. You just need to be sure you’re buying at reasonable valuations. For the first time in years, price matters for technology the same way it does for any other sector.