Whatever It Is...It's Going To Be Big

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

There's a lot going in the world and many external factors that could affect markets going forward. Who knows how things will turn out, but one thing's for sure - whatever is about to happen is going to be big. The 1988 movie "Big" is the inspiration for this week's musings. Here's some trivia about the movie:

The film was made on a meager budget of $18 million, but made more than $151 million worldwide.
While Hanks had starred in a a few successful movies prior to "Big", such as "The Money Pit" and "Dragnet," this movie launched him into the stratosphere as a major movie star.
On the day of filming the Walking Piano scene, Hanks and Robert Loggia noticed they had doubles of the actors on the set in case the two of them were unable to do the dance moves correctly. Hanks & Loggia took the challenge and filmed the scene successfully without the use of doubles.
In order to help Hanks act like a 13-year-old in the movie, director Penny Marshall filmed each of the "grown-up" scenes with actor David Moscow (young Josh) first so that Hanks could mimic the behavior in the actual scene as a 13-year-old might.
The "Shimmy Shimmy Ko Ko Bop" rap was Hanks' idea. According to Hanks, his own son had learned the song at summer camp. Hanks introduced the song with some made up lyrics.

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

I Don't Get It. We shouldn't be surprised by the lackluster returns the last week in September and the first week in October. October, historically, is one of the scariest months for equity returns. When the market has been up by more than 20% heading into the last quarter of the year, the month of October is negative 7 out of 9 occurrences. The average return for October in those instances is -3%, while the overall historical average for the month of October is +0.9% since 1950. Not to mention, we're entering the last 30 days before Election Day, which is likely to bring more volatility. On the plus side, the Labor Report this morning showed the largest month-over-month gain in jobs in 6 months. The report showed 254,000 jobs added in September versus 147,000 forecast. In addition, last month's report was revised higher by 17,000 jobs. The last several months have been the opposite, as jobs numbers were revised lower the last four consecutive months. It's important to note that there was considerable spike in Government jobs added. However, there was positive news on the Construction industry, as it was the fourth largest increase in jobs in September. Speaking of jobs, earlier in the week it was reported that the Longshoreman Union had organized a strike at ports all along the east coast. This was certain to hurt commerce and be a negative component to 3rd quarter GDP. But, by late Thursday night, it was reported that the strike has been put on hold until early next year with a negotiation taking place between employers and the union. The Jobs Report has received a resounding cheer from Wall Street. Just one day ago - prior to the Labor Report, the market was showing a 68% probability of another 50 basis point rate cut in November. Now, after the release of the report, there is only a 5% probability of another 50 bps rate cut. There's a lot of disruption in the markets right now and we're all feeling like Josh Baskin while sitting in his first marketing meeting at MacMillan Toys and is asked to review a building that turns into a robot, to which he replies, "I don't get it."

Let's Be Grown Ups. After Josh makes inroads with Susan, she realizes it's time to move on from Paul. Paul mocks Josh for his "I don't get it" comments then proceeds to ask Susan what so special about Josh. She replies, "He's a grown up." The irony should not be lost on us that Hanks' character is acting more grown up than an adult, when he's actually only 13 years old. When we see dislocations in the market, as investors, we need to be grown ups and play the long game. Currently, global markets are showing high concentrations in companies among the top 10 of each market in terms of earnings and market cap. We have seen this play out before in 2000 when technological revolutions led to high concentrations in equity markets. When we see dislocations such as this, we should be thinking about improving diversification and reducing concentration among portfolios. As the Fed enters a new rate cutting cycle, it's important to remember that corporate earnings typically follow suit. Though borrowing costs should decline with lower rates, so to do profit margins as companies struggle to charge more for goods/services. The graph on the right shows when Fed rates peak and begin to drop, corporate profit growth tends to decline along with rates. Currently, we believe that prices have extended beyond earnings valuations. Certainly, equities have performed well in the past when the Fed began cutting rates, and this time may end similarly. However, when prices are extended as they are and the Fed begins cutting rates, trouble tends to arise. Who know how long it may take for that to manifest itself. After today's Jobs Report, it's clear the Labor Market has not yet begun to contract, which is a good thing. What does seem to be occurring is a phenomenon called "labor hoarding." Companies don't want to fire good employees as consumer demand is currently strong enough to sustain profitability. However, there isn't enough demand to require a pick up in the hiring rate. It's possible the economy achieves a "soft landing" and equity markets continue higher. Or, we're witnessing the peak of demand and an over-extended equity market. Either way, given stretched valuations, it would be the grown up thing to do to keep portfolios diversified instead of taking on more risk.

P.S. - I would be remiss if I didn't mention the tragic circumstances that have affected the areas of GA, TN, NC, etc. due to Hurricane Helene. Obviously our prayers are with the people of that region.

You won't see that on a marketing report...
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