Weekly Newsletter: November 3, 2025
The sugar rush from the Halloween candy is real, but then so is the sugar crash. For anyone with small kids, the absolute craziness is followed by the brick wall they all eventually hit. The financial markets are experiencing a bit of a sugar rush as well. The spending from the various big tech names continues to excite investors, even though actual revenue from AI has yet to show up meaningfully in earnings reports. The Fed did its part by cutting interest rates by a quarter percent, as was expected. A few surprises in that one governor chose to keep rates the same, while Fed Chair Powell indicated in the press conference not to get too excited about another cut in December. Certainly, the lack of economic data may play into the comments, as the usual guideposts to judge economic growth have been removed. There are efforts to glean data from the earnings reports, which indicate the consumer is doing ok, with the inevitable weakness as well. Looking at airlines and credit card companies, spending remains brisk. Looking at some fast food/casual places, the consumer is pulling back a bit. Employment data from ADP, which is not impacted by the government shutdown, is trying to fill the void. However, here too, the data history is rather short, and the relationships between ADP and the government data are inconsistent. Thus far, the markets have strung together six monthly gains and are among the most expensive in history. Wondering when they hit the wall.
The economic data point of the week was the Fed meeting. With the government still shut down, the “big” data points have been replaced by various historically minor reports that fail to provide a comprehensive picture of the economy. In a rare decision for the Fed, especially over the past 30 years, there were two dissents from the decision to cut rates by a quarter point. The most recent appointee, to no one’s surprise, wanted a half point, matching his decision from the last meeting. There was also one who wanted to keep rates unchanged. The general trend since the early 1990s has been a unanimous decision. Further complicating matters, at least for the markets, was Powell’s comments about a December rate cut being “not a foregone conclusion”. If these cuts were meant as “insurance cuts” to help prevent the employment situation from getting worse, then it makes some sense to wait and see what the impact of the cuts is on the economy. One other note from the meeting is that the Fed is now holding its balance sheet steady. Various quantitative easing cycles, beginning in 2008, have pushed the Fed’s balance sheet to just under $7 trillion from merely $1 trillion prior. If the Fed is holding securities, then investors are holding the cash from those “sales,” and the economy remains awash in the excess cash, making the fight against inflation that much tougher in the months ahead.
As was the case a year ago, interest rates rose after the Fed’s decision to cut rates. In all likelihood, they rose as expectations for further cuts were quashed in the press conference. Investor’s penchant for continued risk taking is seen in the very close yields between the “junky” bonds and “pristine” treasuries. Those differences remain near historically low levels. With markets near all-time highs and financial stresses near historically low levels, the Fed’s December meeting is getting that much more interesting.
While technology stocks garnered all the attention this week, pushing the averages up for yet another week, it is what is going on below the surface that is becoming a bit more interesting. Less than 40% of the stocks within the SP500 are trading above their short and intermediate-term average prices. Further, while the averages rose on the week, the number of stocks that rose on the week was half of those that were falling. Even as earnings came in better than expected for many of the consumer staples sector, the average stock dropped. The dichotomy between the tech sector and the rest of the market has been a “feature” of this market over the past year. Sentiment readings are once again getting very bullish, and valuations (which have been a concern all year) remain at or near historically high levels. With the Fed stopping the contraction of its balance sheet, it may allow for additional money to stay within the markets rather than draining liquidity. The markets may remain sweet for a while longer before the sour begins to tickle the taste buds.
Assuming the government shutdown lingers most (if not all) of the week, economic data will be limited to non-government reports. There will be plenty of Fed speakers now that their meeting is done. Their comments may carry more weight without the help of economic data.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.