The last week of September is typically characterized by quarter-end window dressing, as institutional managers try to make their portfolios look “extra pretty” by pruning out weak stocks and adding many of our fundamentally superior stocks. I should add that Micron Technology’s better-than-expected earnings announcement on Wednesday for its high-speed memory chips has re-ignited many AI-related stocks.
As Hurricane Helene winds down, a new economic storm is forming, as the International Longshoreman Union and their 25,000 members walked off the job this week, which has effectively shut down three dozen U.S. ports, stopping most containers from being shipped to the U.S., and potentially disrupting holiday sales. Even if the strike lasts just two weeks, it could disrupt sales and supply chains for drugs and other essential products.
In an attempt to bypass U.S. port operations, DP World, a Dubai-based global logistics company, is talking to Mexico about allowing their ports to take the added load, which would enable the company to handle cargo headed for the U.S., so if U.S. ports become congested or cannot comply with California’s strict green rules (to be zero carbon), shippers can divert their cargo to Mexico. Mexico is also building a railroad to transport containers to compete with the Panama Canal, which has suffered from a prolonged drought, creating long delays there.
October is a seasonally strong month and November is even stronger. As the holidays approach, America gradually gets in a better mood and consumer spending tends to perk up.
Here are the most important market news items and what this news means:
- If the Longshoreman strike was not enough bad news, the ISM manufacturing report announced on Tuesday was horrific. Specifically, the ISM manufacturing PMI remained at 47.2 in September, which is the same as in August, but any reading below 50 signals a contraction. This is the 23rd month that the ISM manufacturing index has been below 50, with only one month that the index rose briefly above 50. The new export orders component plunged to 45.3 in September, down from 48.6 in August, and was especially disappointing. Only five of the 18 manufacturing industries that ISM surveyed reported an expansion in September, so the manufacturing recession persists.
- In the wake of Microsoft convincing Constellation Energy to restart a nuclear reactor at Three Mile Island to produce electricity for its data centers, there are growing calls to increase nuclear energy. As an example, Peter Thiel’s Founders Fund is backing a nuclear energy start-up that would utilize low-enriched uranium, called Haleu. Nvidia founder, Jensen Huang said, “Nuclear is wonderful as one of the sources of energy, one of the sources of sustainable energy.” Huang added “It (nuclear) won’t be the only one. We’re going to need energy from all sources and balance the availability and the cost of energy as well as the sustainability over time.” In some parts of the world, there is insufficient electricity to build new data centers, so panic is starting to set in on how to double the electricity grid for AI demand and growing EV demand.
- October is a seasonally strong month, but often starts slow and then picks up as third-quarter earnings announcements commence. As a result, I am expecting that the second half of October will be stronger than the first half. Investors are expected to be on high alert for an “October surprise,” such as an Iranian retaliatory attack on Israel or even another attempt on Donald Trump’s life for killing Iranian General Qasem Soleimani.
- Typically, consumer confidence rises as the November Presidential election nears. The sudden drop in the Conference Board’s Consumer Confidence Index was abnormal but bodes well for Donald Trump since the economy and inflation are the top voter concerns. Interestingly, Amazon’s subsidiary, Whole Foods, asked its customers to quit calling it “Whole Pay Check!” Obviously, lingering inflation concerns and economic anxieties persist.
- The Vice Presidential debate this week should be very entertaining. Although Vice Presidential debates tend to not change voters’ minds, there could still be a “breakout moment” that could sway a minority of voters. The boos that Tim Waltz received at the Minnesota/Michigan football game compared with the cheers that Donald Trump got at the Georgia/Alabama football game is a sign that voters have already made up their minds. Nonetheless, the goals of both JD Vance and Tim Waltz are to appear competent, and likable and sway undecided voters.
- Eurostat reported on Tuesday that consumer inflation in the eurozone is now running at a 1.8% annual pace through September, down from a 2.2% annual pace through August, which is setting up the European Central Bank (ECB) for another key interest rate cut. ECB President Christine Lagarde has hinted that another key interest rate cut would likely be forthcoming. The next ECB meeting is October 17th. Interestingly, since the Bank of England has only cut key interest rates 0.25%, the British pound has appreciated against the U.S. dollar and other currencies.
In summary, as the third-quarter earnings announcements commence, I expect that fundamentally superior stocks will benefit from wave after wave of earnings surprises. By early November, we should know who the next President will be (provided we do not have a contested election), and the Fed will cut key interest rates again. Consumer sentiment should improve with most of the economic and political uncertainty removed. As the holidays approach, consumers should be in a good mood, even if the Longshoreman strike disrupts holiday sales. This is why our stocks typically benefit from an “early January effect,” since Thanksgiving commences the holiday season and the happy time of year.
