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Have Investors Been Under A Spell? Thumbnail

Have Investors Been Under A Spell?

Market Musings

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group


It would appear that investors have been under a spell, so to speak, over the past 12 months, especially when it comes to AI-related names.  Flows into equities have been strong this year, but it might be time to regroup and diversify.  The 1957 song "I Put A Spell On You" is the inspiration for this week's musings.  Here's some trivia about the song:

  • This song was written and performed by Jay Hawkins in 1956, but the original was a much slower version.  He re-recorded the song for another label a year later, transforming it into a faster, spookier version.  That version sold more than 1 million copies.
  • The more ghoulish version of the song was first performed by Hawkins at a Christmas concert in 1956.  He even developed a bizarre stage show around the song, coming out in a flaming coffin, wielding a skull walking stick.
  • The producers of the track wanted a "weird" sound during recording, so they gave the musicians a lot of food and alcohol to create a "party" atmosphere at the recoding session.
  • The song has been covered famously by Creedence Clearwater Revival, The Animals, Nina Simone, Marilyn Manson, Joe Cocker, and Notorious B.I.G.
  • This song was also featured in the Halloween classic 1993 film "Hocus Pocus," with Bette Midler providing the lead vocals and even adding several lyrics to the film's version of the song.


"I put a spell on you
Because you're mine
Stop the things you do
Watch out
I ain't lyin'

Yeah, I can't stand
No runnin' around
I can't stand
No put me down
I put a spell on you
Because you're mine, ohh yeah"

Here's what we've seen so far this week..


Spooky Markets.  We are starting to see some erratic performance in certain stocks and stock sectors that should give investors pause instead of ushering in additional flows to said equities.  Over the last couple of months, we've seen considerable weakness in the Microchip & Semiconductor sector. Since the peak on July 10th, Semiconductors as a group are down more than 16%.  The number of stocks making new lows on the Nasdaq tech-heavy index have risen by 140%.  This should not come as much of a surprise as market valuations are high and earnings are being revised lower.  Of the 20 valuation metrics measured by Bank of America, 19 are showing the S&P 500 Index is statistically expensive.  If we compare valuation to earnings, the disparity between the two is the highest its been since the late 1990s.  Earnings drive stock prices and we're seeing fewer companies beat earnings expectations.  Overall, 37% of the S&P 500 companies have reported Q3 earnings and only 75% have reported above the earnings estimate.  That's below the 5-year average of 77% beat rate.  In addition, despite the fact that the earnings bar was consistently lowered post-COVID, more analysts are revising Q4, Q1 '25, and Q2 '25 earnings lower.  It's possible we'll start to see the cracks develop first within the Tech sector as some key tech companies are reporting bloated semiconductor supply and a slowdown in capex spending.  While no two markets are exactly alike, we have seen a version of this once before.  In mid-1999, the Nasdaq Composite Index was steadily moving higher until October of that year.  Then, the mania around internet stocks sparked an 80%+ move in the Nasdaq through February of 2000.  By March, the ride was over and investors saw the Nasdaq plummet by more than 70% until October, 2002.  Yet, the S&P 500 Index remained relatively resilient in 2000, until about September of that year.  While the S&P fell also throughout 2000, 2001, & 2002, it only saw 63% of the downside risk that the Nasdaq experienced.  When asked by the Conference Board in their "Consumer Confidence" survey, investors still think that stock prices will be higher 12 months from now.  So much so, in fact, that the sentiment from the survey hit an all-time high this week - a euphoric indication to be sure.  Are we calling for the market to fall to pieces anytime soon?  Not necessarily, but diversification away from tech-heavy names would certainly make some sense at this point.

Spell On The Economy Over?  Overall, the economic data have been fairly positive this week.  However, if we take a deeper look as some of the numbers, there are some puzzling metrics and some concerns.  The JOLTs Job Openings for September moved lower for the 5th month out of the last 8 months.  That's not a new trend and the total openings (7.4 mil) is still above the pre-pandemic level (6.8 mil).  However, just as we mentioned back in August regarding the revision to payrolls data, we're now seeing considerable revision in job openings data.  In 2024, we've seen 5 of the last 8 months job openings revised lower by a total of 839,000.  A further look at the JOLTs numbers involves the number of "layoffs" reported.  Since bottoming in 2021, the number of layoffs has steadily grown by more than 570,000.  The pre-pandemic level was still much higher than the current level of layoffs, but the trend is clear and the most recent report showed the largest one-month increase since early 2023.  Tomorrow's Jobs Report is expected to show approximately 108,000 jobs were added in October.  That's not a robust number, but still above the typical recessionary signal of sub-100k.  However, this week's ADP report of Private Payrolls indicated 233,000 jobs were added.  Yet, if we look at that report, the adjustment made for seasonality was a bit unusual.  The actual month-over-month change in the report was actually 117,000 instead of 233,000.  The adjustment for seasonality for the month of October has typically been much more nuanced that this year's out-sized adjustment for the month.  What is it about this year that makes the adjustment for October so out-sized?  Perhaps its the hurricanes that hit in September and October (Helene & Milton)?  Well, according to the data, there were more hurricanes in Sept/Oct in 2022, 2020, 2018, yet the seasonal adjustments to the ADP numbers were much smaller in those years than this year.  Finally, the economy (and the market) are driven by earnings which are driven by consumers.  The level of unpaid credit card debt is something that could derail the consumer moving forward.  So far in 2024, it's been a bit localized to the lower-end consumer.  As of last month, the level of unpaid credit card debt was the highest in a decade.  More importantly, though, credit card debt is starting to affect the middle-income earners.  According to the survey of consumer expectations by the New York Federal Reserve, more consumers with $100,000 incomes and higher expect to have a debt delinquency in the next year.  In fact, the level of delinquency expectations among that group is the highest its been in a decade.  The fast-approaching retail season over the holidays will provide considerable evidence of the health of the consumer.

The original is the best...
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