As widely expected Federal Reserve policy makers left interest rates unchanged while saying the argument for higher borrowing costs strengthened further amid accelerating inflation, reinforcing expectations for a hike next month.

In my view perhaps the greatest change in yesterday’s post meeting statement is that inflation is on track to reach their 2% target, omitting the much known phrase “inflation would probably remain low in the near term.”

I ask are inflationary expectations beginning to rise?  As noted many times, inflation is a two part phenomena; a monetary and psychological component defined as too much money chasing too few goods fearing higher prices tomorrow

How will a December increase affect equities given the markets are now completely dominated by cross correlated technology based trading models where interest rates are the largest variable.

The other day Laurence Fink, CEO of the largest asset manager, commented “equities are no longer being bought for fundamental value but rather purchased indiscriminately based upon market capitalization.”

Wow!  Against this backdrop I cynically ask why are a gazillion people registered for the three year CFA program since fundamental security analysis is no longer required?  The path way to riches is not study and analysis but blindly buying the largest companies in an index.

As noted above, interest rates are the largest component of cross correlated trading models that is about 90% of the market volume, volume focused in the largest capitalized companies.  It is no wonder why the majority of bulge bracket firms are universally bearish forecasting between a 5% and 20% drop in equities.

And now onto the election.  Yesterday Bloomberg reported that over 370 “blue chip economists” are stating that a Trump victory will be bad for the economy and the stock market.  This headline reminded me of a similar headline in June when the vast majority of British economists and CEOs of the largest companies warned about Brexit, warning of an economic disaster.

Britain’s economy expanded in the third quarter by a 0.5%.   Consensus had expected a nominal decline.

While it is too early to write Britain’s establishment was sensational, I do think it is of great significance that American small business owners are the most uncertain in 42 years.  Many are exhausted from the last eight years where regulations increased exponentially, fearful of another 4.  I think it is of considerable significance that small business owner’s support Trump by a 2:1 margin.  Wow!

As widely known, according to the BLS 90% of the jobs growth from 1996-2007 was from small business, defined as companies who employ 499 people or less.

In many regards job creation has been anemic given the four decade low of the labor participation rate (LPR).  As commented many times if the LPR was around 2007 level, the unemployment rate would be around 10% not the stated rate of 5.0%

Speaking of jobs, tomorrow the October labor report is released.  How will the data impact the markets?  Or will all be myopically fixated on the election?

Commenting briefly on yesterday’s market activity, the Dow was down about 0.40% while the NASDQ slid 0.75% on interest rate fears.  Three of the five largest S & P companies are NASDAQ listed companies, shares that are vastly over owned and are most at risk to an increase in interest rates.  The 10-year was up 8/32.

Last night the foreign markets were up.  London was down 0.23%, Paris up 0.71% and Frankfurt up 0.16%.  China was up 0.84%,  Japan down 1.76% and Hang Sang down 0.56%.

The Dow should open nominally higher following seven days of consecutive losses.  The 10-year is off 3/32 to yield 1.83%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.