The Zigmont Report (Daily Market Recap for 10/2/17)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.

The opinions expressed below are my own

It continues.  The bull market, that is.  The news of the day was almost completely dedicated to the mass shooting in Las Vegas.  Financial news was minor and so it took a backseat to the Vegas stuff.  Here’s the economic data that mattered (to me)…. The market didn’t give a hoot:

  • Sep ISM manufacturing (60.8 vs 58.1 est & 58.8 prior)

o   Big surprise, highest print since ‘04

o   Good for manufacturing sector

  • Sep ISM prices paid (71.5 vs 63.0 est & 62.0 prior)

o   Big surprise, highest print since ‘11

o   Inflation harbinger?

If the manufacturing sector is getting juiced *and* the inflation pressures there are building, that’s a big matzah ball, Georgie boy.

Whether it’s bullish or bearish in the near term is debatable but it certainly suggests that the Fed, in its persistent expectation of coming inflation, is on to something.  This also means that hawkishness might be the default tone out of the Fed for a while.  This is significant.

In the past, a hiking Fed didn’t derail the bullish run during the hike-cycle, but at some point the market broke.  Take a look.  This is from late ’03 to ’08.

S&P 500 in orange, Fed Funds target rate in white.

Notice that the S&P kept trucking higher during the entire hiking phase, which was a somewhat aggressive hiking stretch, because of its consistency.

So the bullish narrative today, is strongly influenced by that history.  The Fed might continue to hike/normalize but it won’t derail the stock market because the economy will continue to grow.  Only when the economy rolled over (or at least certain sectors), did the market follow suit.

I don’t think the bulls should be drawing such strong parallels but they do have a historical example in which they can place their faith.

The point that I want to make here is simply that the bulls are not worried about the Fed.  I think that’s a mistake but it doesn’t matter what I think.  The bulls have the trend as their friend and data that, in the past, would cool their jets…. doesn’t make them think twice.  Buy the dip, buy the pause, buy the rally.

It’s not going to end well when it ends.  Is that going to happen soon?  Doesn’t look that way.

See you tomorrow,