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What a crazy week.  I am happy to announce that the Federal Reserve may be thinking about thinking about (not a typo) future interest rate hikes beyond the early November meeting.  With this information, the markets were off to the races, if not a little prematurely.  All three major U.S. indices will finish the week decidedly higher.  That’s not to say we’re out of the woods, as the sometimes-fickle Fed may throw a wrench into things as it sees fit.  Yet, we are presently coming upon the precipice of a slowdown in interest rate hikes.

Aside from a potential Fed pivot, as it’s being called, we have earnings announcements which have been better than expected.  The key word is expectations.  It seems the pendulum swung too far into the world-is-coming-to-an-end direction, as analysts had factored in the apocalypse with their downward earnings revisions these past couple months.  Fortunately, the third quarter wasn’t as bad as to doomsayers believed, and even though some companies are facing considerable headwinds with both labor costs and the strength of the U.S. Dollar, they are beating expectations.  And that’s all that matters to investors.

By the way, last week’s epic rollercoaster ride is still a bit of a mystery.  Again, expectations were quite low, but that doesn’t explain the wild gains and market swings we experienced last week.  Some believe that investors who had shorted the market had to cover their positions (called a short-squeeze), which drove markets higher as they bought.  Others speculate it had to do with algorithmic trading, i.e. autonomous computer trading, which simultaneously recognized the S&P 500 had given up 50% of its post-COVID rally and all bought on the same day, contributing to the rapid ascent in the markets.  It was, “home to one of the biggest intra-day turnarounds in living memory”, said one analyst at Deutsche Bank.  The S&P 500 futures peaked at +1.57% ahead of the CPI release, bottomed out -2.4%, and closed +2.6% with a roundtrip intraday range of 5.52%.  The Dow rallied +1,400 points from its low.

One thing worth noting is that as the pendulum swings from optimism to pessimism, and back again, the media tends to swing in the same direction too.  While the market was falling in the third quarter, we heard nothing but doom and gloom from one guest to the next.  Never-ending talk of rising inflation and imminent recession, if not in a recession RIGHT NOW, sparked fear which found its way into trading.  The fear builds on itself and takes on a life of its own.  Last week, and this week too, we’ve seen a flip with regards to financial media.  I can’t tell you how many analysts and guests are now talking about the end of quantitative tightening and how now is the time to buy since valuations are so low.  Where were these people a couple weeks ago?  The mood is downright festive, in large part due to the way the financial media portrays the economy.  That’s not to say that we are not closer to the end of tightening than we were a few months ago, but that investor behavior is much more emotionally driven than many academics would admit.  Let’s take these past two weeks and enjoy the nice rally we’ve just experienced.  However, know that the pendulum (and the media) will continue to drive investor behavior.  If earnings announcements remain modestly good over the next few weeks, we might expect the atmosphere to continue to lean toward optimism into the end of the year.

As for the story of the week, I’ve been sitting on this one for a few weeks now.  If you are beginning to think about holiday shopping for your loved ones, I might just have the gift for you.  I admit I was surprised by this offering, but after a little due diligence, it is in fact purportedly real.  I stumbled upon a company that bills itself as the world’s first carbon offset service for human breath.  Yes, you read that right.  YepYou claims human breath accounts for 7% of all human made emissions.  For just $17 per year, this company claims “it will grow new forests to restore natural habitat and the planet’s ability to absorb CO2.”  And just in case you were wondering, they can offset your pet’s CO2 emissions too.  However, before you run out and given them your money, you should know that Greenpeace International believes carbon offsets are a scam, and John Oliver did a piece last month discussing the pitfalls of “Offsetting our way out of climate change.”  I am not endorsing this company (please do your own research on it), but there could be a co-worker of mine who might just be getting this for Christmas.  Now you know. 

Bruce J. Mason, MBA