Equites led by the richly valued NASDAQ declined moderately Friday on fears that monetary policy may not be as dovish as previously believed [and discounted]. I have lost count as to how many times this scenario has unfolded over the last two years. At the time of this writing the market is now suggesting only a 50% probability that the overnight rate will be lowered in December.
The S & P 500 had its worst week in about two months and about half of the advance since Election Day has been erased.
Some are again fearing potentially larger budget deficits [projected annual deficits that were already around record levels ex COVID stimulus], the result of a change in tax policy. Then there is also the inflation dilemma. Will inflation accelerate from current stubborn levels partially the result of tariffs?
Several times I had euphemistically stated the twin deficits [annual and total federal deficits] would become a major issue on November 6. Perhaps this statement was indeed prophetic.
Bloomberg noted on Friday the impact that higher rates are having on the S & P 500 as the median interest expense for a member company is at the highest level on record. This metric bears watching because cash flow is not a record. It is at its seventh highest. The ratio of cashflow to interest is still healthy but there are fears that the trend may turn negative.
Perhaps contrary to the popular narrative, the median interest expense for Russell 2000 companies also rose to the highest ever, but so did trailing 12-month cashflow. It broke the record set in 2021. Typically in a rising rate environment, smaller companies have greater exposure or risk to rising rates.
What will happen this week?
The economic calendar is comprised of several housing statistics, the Index of Leading Economic Indicators, a sentiment and manufacturing surveys.
Last night the foreign markets were mixed. London was up 0.10%, Paris down 0.16% and Frankfurt 0.26% . China was down 0.21%, Japan up 1.09% and Hang Seng up 0.77%.
Futures are flat. The 10-year is off 9/32 to yield 4.48%.
