The history of Wall Street has taught me to be nervous on Mondays in October. This Monday is also crowded with meetings with strategic partners and friends from across the seas and the Gulf. So my market call must be short and sweet.
I had given 10 reasons why September augured to be a dodgy month for the US stock market. Despite Friday’s impressive index surge, I am still skittish about October. While all is hunky dory on the index front, there is deep distress at the sector and company levels. FedEx, Nike, and Sherwin Williams tell us what happens when higher labour costs and supply chain chaos guts operating margins. Are these three companies canaries in the coal mine for Q3 earnings, whose comps will be hard to beat in any case I fear so.
The political mudslinging in Washington is also a sword of Damocles for the indices since the debt ceiling, Biden’s infrastructure bill and income tax increases could all cast a negative shadow at a time when the energy crisis, King Dollar and the China growth stocks unnerve global markets. The onus of proving that all is best in this best of all Panglosian worlds now lies on the shoulders of the bulls and I doubt that they will be upto it.
The S&P 500 index has violated technical taboos and I can easily envisage a test of July lows at 4250 which I fear will not hold. If we violate 4250, then there is no reason that the algo tribes will not take us down to the 200 day moving averages lurking furtively at 4135. This could be the 10% correction we have all wished for ever since Thomas Jefferson lived in the White House and negotiated the Louisiana Purchase with Sally Hemmings thrown in for Presidential comfort.
Seasonals are not on the side of the indices and the macro narrative has gone ugly. 50% of Nasdaq stocks are now down more than 20% from their highs, a classic bear market definition. There is also rising risk that Biden will not renominate Fed chairman Powell as the progressive under senator Elizabeth/Pocahontas Warren bay for his blood.
I expected the steeper yield curve and Brent surge so I rotated into the value/cyclicals that had lagged ever since June but the sector rotations are always messy in an iffy macro zeitgeist. The Merck antiviral news is a bullish omen, as is the peak in Delta virus deaths but everything is hostage to Washington’s toxic politics and clear evidence of acceleration in the global economy.
Chinese President Xi Jinping’s order for his air force squadrons to buzz Taiwan’s air defences demonstrates the rising geopolitical risk in the Indo-Pacific as does India’s Agni-5 ICBM which Maj. Gen. Bakshi of Republic TV assures me can incinerate both Beijing and Islamabad. The last thing the world needs is a geopolitical black swan in the Indian Ocean or the Straits of Taiwan, let alone the Rann of Kutch.
Matein Khalid is Chief Investment Officer at Asas Capital