Johny Fernandez: It’s noon on this Friday, and Wall Street is still on track for a rough week. This time, it’s the Dow taking the biggest hit. American Express is one of the biggest drags on the blue chips after its latest earnings report. And Caterpillar is also slipping again today. The stock is now down about 15% over the past month. And the machine maker is often seen as a barometer for American industry. But this slide may have more to do with the stock itself. Shares have gotten pricey, and some investors are cashing in on their gains, and it’s not necessarily a sign that US manufacturing is in trouble. In fact, an early look at American factory activity for October came in better than expected this morning.
So joining us to discuss this and more is Tim Anderson, managing director of TJM Investments. Tim, thanks so much for joining us.
Tim Anderson: It’s so good to be with you today, to finish off the week with a vibrant conversation.
Johny Fernandez: Exactly. So let’s go ahead and get started with the economy. An early look at US factory activity for October came in better than expected this morning. So what numbers are you watching to gauge how the economy is doing?
Tim Anderson: Well, we’re right in the middle of earnings season, and you just mentioned a couple of benchmark blue-chip stocks that are weighing on the Dow right now. I might also add that, you know, Caterpillar became a pretty significant AI-related data center buildout play. And that’s one of the reasons why the stock might be giving up quite a bit in the last few sessions. A lot of stocks that have participated in the big upside from the data center buildout story have been giving up some of their gains this week.
But, you know, the selling hasn’t really turned into a rout on the market overall. The S&P 500 is down just less than 2% below the 7,800 level, which was kind of a big breakout people were looking at a couple of weeks ago. And even yesterday, when you had a lot of heavy selling and the Dow and the Nasdaq were down significantly, and you had a lot of profit-taking in names that people have had multifold gains in this year, the advance-declines were positive by like 16 to 11.
So look, there are a lot of nodes of uncertainty in the market, from the Russia-Ukraine war causing more headlines than it has for a while, to, you know, what the next steps are in Iran, to what’s going to come out of the midterm elections in 11 days. And, you know, uncertainty always gets investors to pause for a little bit, waiting for some clarity.
Johny Fernandez: So I want to talk about that uncertainty, because obviously, between oil, the other big conversation is the Fed. So traders see almost no chance that the Fed could raise rates at next week’s meeting. But obviously, you know, that’s a conversation that we’ve been having for the last couple of weeks. So stocks have still been a little bumpy the past week. So is the Fed even a risk for this market right now? I mean, what do you think?
Tim Anderson: I would be very surprised to see them hike rates at the meeting next week. I know that the last little piece of inflation data was a little bit hotter than what some people liked. But their key measure of inflation, the PCE report, the last time that came out, showed some cooling in the core inflation numbers, where you take out food and energy, which I know a lot of people will say, well, what sense does that make? That’s a key impact on consumers’ cost of living.
But look, one or two events in the Iran situation, and oil could come down $20 very, very rapidly. So we have to wait and see how that plays out a little bit. And for the Fed, the big question will obviously be what they say, not just what they do or don’t do, but what they say, what their tenor is about their inflation outlook going into early next year. And of course, they’ll have a meeting in early December, where the probability is still probably tilting a little bit toward a rate hike. But the data we get between now and then will have an impact on that.
Johny Fernandez: Well, definitely the data. And obviously we’re all really eyeing Kevin Warsh and his administration, because it’s obviously a completely different administration than the previous one. So let’s switch gears to small-company stocks. They fell into a correction last week, down about 10% from their highs. Yesterday, more S&P stocks rose than fell, and today the Dow, you know, is struggling. So are enough stocks joining in to make this a healthy market?
Tim Anderson: Well, look, the small-cap stocks are going to be affected much more by rising rates than big-cap stocks are. That’s just always been like that. When rates got up to 5.25%, I think that the selling was a little bit overdone in the bond market. Now they’re a little bit below 5%. I think there are so many dynamics that are changing significantly in the way investors have to look at the overall economic forecast and what’s really driving the economy that it’s an adjustment process for a lot of people.
I don’t want to say it’s different this time, but it’s taking big investors, hedge funds, money managers, the whole investment landscape, some time to adjust to what’s really a changing dynamic in the market. And look, I think that the strong stocks in the market, healthy companies, can handle 5% interest rates, even though those rates are much higher than they’ve been for 15 to 20, 15 years or so. There are times in the past when the economy and the stock market acted very well with 5% interest rates. It’s just that for 15 years, with rates significantly lower, and way too much time spent around zero, a lot of investors became conditioned to that, and we got used to that type of pricing.
Johny Fernandez: And obviously, it’s a little bit of a shock after 15 years. So it definitely is something that, you know, everyone is looking at, and we’re being a little cautious. But let’s talk big names. GE and major banks have pulled back from their summer highs. Software stocks have taken off since July, while chipmakers have cooled. So is the market being pulled in different directions?
Tim Anderson: It is being pulled in different directions, and there are a lot of dynamic events going on in the market, both technically and fundamentally. Look, you mentioned the software stocks. They got really, really beat up because people thought that software was just going to get destroyed by AI. So a lot of those names went down 50% or more, and they’ve rallied off those lows. So that’s been a bright spot in the market from June to now. And some of the stocks that had just a euphoric rally off the AI and data center buildout story, the memory names, the CPU manufacturing names, the semiconductor names, are having a well-deserved correction.
So it’s a vibrant rotation going on in the market, which is why there are days when you see the Dow just wildly outperform the other major averages, and there are days when you see it the other way around. And I just think that you need to start to look at things on a week-to-week basis rather than a day-to-day basis. And we’re right in the middle of earnings season, and you want to pay a lot of attention to what companies are going to say going forward into ‘27. And not just the hyperscalers, not just the chip companies, and not just those companies that are right on the front line of manufacturing components for AI and doing the data center buildout, but those companies that are instituting some of the AI processes at their operating level. To what degree does that improve their productivity and their margins?
Johny Fernandez: Yeah, it’s definitely interesting to see, number one, how these results come out. And like you said, it’s a day-by-day thing, but also a week-by-week thing, so I definitely do agree with that. I also want to talk right now about gold and silver, because obviously we’re seeing them slip, even though the dollar has backed off its high and fewer traders, you know, expect this hike to happen. What’s weighing on the precious metals? Because we’re seeing things change drastically when it comes to the metals.
Tim Anderson: Yes. I think that, clearly, the dollar has been quite strong, maybe not the last couple of days, and that was what brought gold down from its 5,000 level. And interest rates being higher has made the cost of carrying gold a little bit more expensive. There’s no dividend on gold. There’s no, you know, embedded return. So if it costs a little bit more to carry, that’s going to have an impact also.
Interestingly, some of the gold miners are up a little bit the last couple of days, even though gold’s been quite a bit lower. I think that’s because a lot of people feel that, from a regulatory perspective, we’re going to have a much easier time building more mining capacity in this country than we’ve had for the last 30 years. That would be good for the mining companies. But clearly, look, the price of gold, the price of silver, and those precious metals have come off, even the price of silver, which has a little bit more of an industrial component with some of the AI buildout.
I don’t really believe the AI story is anywhere near over. I don’t think it’s a bubble. It’s not like 1999 with the internet revolution. But it’s talked about a lot.
Johny Fernandez: Yeah.
Tim Anderson: And, you know, people are like, look, I’m up fivefold in Micron Technology. I don’t want to give all that back. They’re going to sell first and then ask questions a little bit later. So Micron has pulled back maybe 20% off its highs. It’s still going to have a great revenue stream and be very profitable over the next couple of years.
Johny Fernandez: So I want to talk more about, you know, how obviously every day we’re seeing things drastically change. There are a lot of things that are pretty much weighing on the market. So let’s talk about other risks. You know, how much are the national deficit, the war in Iran, and the midterm elections really weighing on stocks? Because everyone is looking towards, you know, the end of this war, and November is coming. So what are your thoughts?
Tim Anderson: Well, the deficit, I’m not going to say it’s not an issue, but it’s been an issue for 20 years. Everybody knows what it is. It’s more of an issue with rates going higher, because that means our cost of issuing US Treasuries is a little bit more, and the interest rate that we pay on everything is going to be a little bit more.
And look, clearly, we want to get through the midterms just to get that piece of uncertainty out of the way. We want to see what the next measures are in Iran to resolve that issue. That’s a big piece of uncertainty. You know what the old saying is? The market loves good news. It can handle bad news, because if it knows what the details are behind the bad news, it can put it into its model. But it just doesn’t like uncertainty.
Johny Fernandez: Yeah.
Tim Anderson: And there are a lot of nodes of uncertainty out there. And we need a little bit of time to define what the likelihood is of resolving those nodes of uncertainty, even if a couple of them might be negative. Because even if they’re negative, if you’re a CIO or a major investment strategist and you can put that into your model, then you have something you can model. If it’s total uncertainty, you’re just going to throw your hands up and say, I’m not really sure right now.
Johny Fernandez: Yeah. So you’d rather have the bad news defined than have complete uncertainty. So there is a lot of uncertainty. But Tim, I want to kind of pull back and look at the big picture. I think a couple of questions: How long does this volatility really last? Where does the market go from here? And do you think the S&P 500 will hit 8,000 by the end of the year?
Tim Anderson: I think it’s very likely that it would. If it doesn’t, it probably hits it in the first quarter of next year. Where is the market going day to day and week to week? I think you’re going to continue to have some volatility. I mean, with the Dow at 50,000 to 55,000, and with the S&P within a percent and a half to 2% of 7,800, these are big numbers. So the nominal volatility is going to be there, although on a percentage basis, it might not be a lot more. It certainly isn’t more than it was during COVID, in the post-COVID period, during the global financial crisis in 2008 to 2010, or during the aftermath of the internet bubble. We have nowhere near the volatility that we had during those periods of market chaos. But we’ve got big numbers right now in the market, so we’re going to have big price swings on a nominal basis. But over the long term, eventually stocks go higher.
Johny Fernandez: All right. Well, Tim, thank you so much for joining us and giving us a breakdown, because obviously there are a lot of questions and a lot of uncertainty. But hopefully, you know, we’ll get a little bit more in the way of answers in the next couple of months. But Tim, thank you so much for joining us today on Market Movers: Midday Edition.
Tim Anderson: It’s always great to talk to you and your viewers. Thank you so much.
