The government shutdown will keep us from seeing the normal array of federal statistics, such as the jobs report (scheduled for last Friday) or the upcoming inflation reports, and other vital statistics, but we got a look at some September statistics last Tuesday, as the Conference Board announced that its consumer confidence index declined to 94.2 in September, down from 97.8 in August. This was largely due to a 7-point decline in the “present situation” component. Their “expectations” component also declined, from 74.7 in August to 73.4 in September. I must say that I am surprised to see such a large decline in consumer confidence, since consumer spending has been outpacing personal income in recent months.
In early October, the S&P 500 is doing well, and the Russell 2000, with mostly smaller-sized stocks, is doing even better, since there is an institutional surge into domestic stocks that benefit from a strong U.S. economy. Overall, October is a positive month, historically, with the second half generally much stronger than the first half, and November is often the strongest month of the year, especially as Thanksgiving approaches. The holidays are a time to celebrate, and that positive sentiment often lifts the stock market.
In general, we don’t need to fear any government shutdown, which is usually positive for stocks.
Here are the most important developments recently and what they mean:
- S&P Global Market Intelligence recently issued a special report that flagged an “alarming surge” in selective defaults. Leverage loan defaults continue to rise in the wake of the First Brands (auto parts) bankruptcy as well as the Tricolor Holdings (subprime auto loans) liquidation, which in turn continues to hinder the private credit industry. If the leveraged loan default rate rises above 9%, I suspect that the private credit industry will grind to a halt. The other possibility is that the Fed comes to the rescue with its upcoming key interest rate cuts in time to save the private credit industry by allowing distressed lenders to refinance at lower yields.
- Amidst the opaque and obscure world of leveraged finance, the U.S. stock market is standing out as a more certain investment due to double-digit earnings growth, the strongest earnings surprises in the past four decades in the second quarter, positive seasonality, and benefiting from strong inflows, especially from foreign investors.
- The technology leadership is increasingly about “betting on a billionaire.” Whether you pick Tim Cook, Jensen Huang, Mark Zuckerberg, etc., is up to you. I have placed my biggest bet on Nvidia’s Jensen Huang, but a new billionaire influencing the stock market is OpenAI’s Sam Altman, who recently announced a “strategic partnership” with AMD that sent its stock soaring.
- I have been very clear that I think Nvidia is the AI leader, but perhaps Sam Altman is worried about the availability of Nvidia GPUs, so it appears that OpenAI also had to make a deal with AMD. Nvidia GPUs remain superior to AMD’s semiconductors, but clearly, the explosive growth in AI is now lifting all boats.
- I have noticed that as economic anxieties rise, that the talk of a stock market “bubble” as increased. Paul Tudor Jones said on CNBC that the stock market is reminiscent of the setup leading up to the burst of the dot-com bubble in late 1999. However, Jones also said that the bull market still has room to run before it reaches its final phase. I agree with Jones, and it is imperative that the stock market’s breadth and power overall improve. Furthermore, it would be odd for the stock market to fizzle when the Fed is cutting key interest rates. I do not want you to worry about a stock market bubble, since as long as the analyst community is raising earnings estimates and the Fed is cutting key interest rates, we can invest confidently in A-rated stocks.
- The big news is that gold is now up 50% year to date due to a lack of confidence in central banks as well as international turmoil. As an example of the turmoil, Japan now has its fifth prime minister in the past five years, namely Sanae Takaichi, who caused the Nikkei to surge based on her promise of more fiscal spending. Unfortunately, the “Takaichi trade” also puts the Bank of Japan in a pickle, since it will not be able to raise key interest rates, so the Japanese yen gapped down almost 2% relative to the U.S. dollar.
- Another example of turmoil is that France lost its new prime minister after just three weeks. Specifically, Sebastian Lecorne became the shortest-serving French prime minister since 1958 and the third prime minister since 2024 over the inability to finalize a budget with Parliament that is controlled by Marine Le Pen’s National Rally party. Finally, I should add that the U.S. federal government shutdown is also related to budget differences with the minority leadership in Congress.
- The European Union continues to change, and another development is that the Czech Republic elected billionaire Andrej Babis’s ANO party, which will now create a new, more conservative ruling coalition. Babis is vowing to make the Czech Republic “the best place to live in the European Union (EU).” Ironically, the Czech Republic will now be more resilient against EU mandates, especially immigration. Babis has also been a critic of seemingly unlimited aid to Ukraine. So now the Czech Republic is expected to be more like Hungary and Poland by pushing back on EU mandates.
Overall, despite the federal government shutdown, the U.S. remains an oasis in the world, with better demographics than Asia and Northern Europe, higher key interest rates, and stronger GDP growth. Despite warning signs from ADP private payroll data, the Conference Board’s consumer confidence index, plus a dramatic declaration in the ISM non-manufacturing, service index, U.S. GDP growth is resurgent with all the onshoring that the Trump Administration is pushing for the automotive, pharmaceutical, and semiconductor industries. We remain in an environment where bad news is considered good news because weak economic news just ensures more key Fed interest rate cuts.
