By Areena Fx- Irrational Exuberance or Just ‘Highly Valued’?
- Now the FED heads start to speak up – Not as clear as you think.
- Oil higher on OPEC+ ‘change of heart’?
- Gold thrashes around – Trump raised the angst at the UN.
- Try the Pear/Gorgonzola Risotto.
**I am on with Maria – Mornings with Maria – Fox Business from 6 – 9 am today. Joining in will be Ashely Davis – grab your coffee – let’s go!
“Irrational Exuberance” does this mean anything to you? If you are a ‘boomer’ or an early Gen X’er – you know exactly what I mean. That was the phrase that then Fed Chair Alan Greenspan used in a speech December 5, 1996, at a dinner for the American Enterprise Institute. During his speech – he questioned whether the stock market had entered a state of excessive valuation, or “irrational exuberance.”
At the time – the S&P had rallied 74% off the March 29th, 1993 low of 439 to a high of 738. While he didn’t actually call the market overvalued, he demanded that investors consider what pushing stocks beyond fundamentals meant and questioned whether it risked a painful and protracted contraction.
Well, global markets reacted instantly: Tokyo and Hong Kong sold off the next day, and U.S. futures dipped and stocks sold off about 6% over the next week, but in the end investors & traders (algos weren’t really a thing then) essentially shrugged it off betting that Greenspan would NOT try to pop the bubble and by the end of that year, stocks had regained those losses.
Now, yesterday – JJ also made a passing comment during a speech in Providence, RI. When asked ‘how much emphasis he and his colleagues place on market prices and whether they have a higher tolerance for higher values,’ he responded with this:
“We do look at overall financial conditions, and we ask ourselves whether our policies are affecting financial conditions in a way that is what we’re trying to achieve, but you’re right, by many measures, for example, equity prices are fairly highly valued.”
Ok – so here it is – Irrational Exuberance is when investors get swept up in optimism and drive prices far above what the fundamentals justify. It’s not just being optimistic — it’s when psychology, herd behavior, and speculation take over, ignoring risk or valuation.
Fairly Highly Valued – is when psychology and prices are NOT absurdly priced but are definitely expensive. Prices are at the upper end of historical ranges. Valuations look stretched relative to fundamentals, risks are elevated.
So, you decide…..are we at a level of irrationality yet?
By the end of the day the Dow lost 90 pts or 0.2%, the S&P lost 37 pts or 0.5%, the Nasdaq down 215 pts or 1%, the Russell gave up 6 pts or 0.25%, the Transports added 92 pts or 0.6%, the Equal Weight S&P ……while the Mag 7 lost 508 pts or 1.6%.
When JJ made his comments in the morning, stocks flipped — from positive early on to negative by the afternoon. And what got hit the hardest? Do I even need to say it? Tech down 0.9%, Consumer Discretionary off 1%, Communications -0.2%, and Financials -0.5%. Now keep in mind, those sectors are already up 21%, 7%, 22%, and 11% year-to-date. So of course they took the brunt of it.
So where did the money flow? Right into Energy (+1.8%), Utilities (+0.5%), Real Estate (+0.8%), and—guess what—Consumer Staples (+0.5%). These sectors are +4%, +13%, +3.3%, and even down 0.3% year-to-date.
And what did we talk about just yesterday? (Think market weights and valuations.)
Here are the weights again for you to consider…..Info Tech 34.7%, Financials 13.5%, Consumer Discretionary 10.7%, Communications 10%, Healthcare ~9.1%, Industrials ~8%, Consumer Staples ~ 4.7%, Energy ~3%, Utilities ~ 2.3%, Real Estate ~ 2% and Basic Materials ~ 1.7%.
Notice anything interesting. This isn’t rocket science—it’s common-sense science!
And to add to the pressure a bit – were a couple of FED members that are out there, telling us all about what they individually think! Beth Hammack (Cleveland), Raffi Bostic (Atlanta) and Jeffrey Schmid (Kansas City) are all leaning toward not cutting any more this year, citing the usual suspect – sticky inflation. St. Louie’s President – Alberto Musalem sees ‘limited room for further easing’. Etc.….
But of course, you have those on the other side…. Austan Goolsbee (Chicago), Mishy Bowman (Vice Chair for Supervision), Chrissy Waller (Vice Chair) and the newest member Stevey Miran all want to cut rates – they would cut today if they could.
And this leaves JJ in a position to navigate the unrest and investors, traders and yes now algo’s in a position to navigate what they think happens next… …..and so, the world turns.
Bonds gained – taking back losses from Monday…. The TLT and TLH rose 0.7% and 0.6% and that sent the 10 yr to fell to 4.10% while the 30-yr fell to 4.71%.
Oil rallied 2.2%, closing at $63.41 after U.S. crude stockpiles fell by 3.8 million barrels last week — a clear sign of strong demand. Then OPEC+ jumped in, suddenly suggesting they may reconsider the November production increase, citing “sluggish Chinese demand.” Honestly, sometimes it feels like someone is just sitting in the back room making up headlines to justify the move. Sluggish Chinese demand? Really? You can do better than that.
Here’s the real issue: if OPEC doesn’t follow through on the production hike they promised, then of course prices will rise. The market had priced in more supply — more supply tends to put pressure on prices, so when you flip the story to less supply, naturally the price action changes. Again, this isn’t rocket science. And this morning – oil is up 10 cts at 63.51.
Gold continues thrash around…..It traded as high as $3791 and as low as $3751. This morning it is up $10 at $3774. Traders this morning are suggesting that yesterday’s speech by Trump at the UN is causing some new geo-political tensions.
In the speech he called out Europe for ‘funding the Russian/Ukraine war’ – How? They keep buying oil from Russia, they keep padding his pockets – he told them to STOP the stupidity. He also called out climate change and unregulated mass migration across Europe that is changing the very face of Paris, Rome, Milan, Madrid, London etc.… Saying that shortly we won’t recognize these historic cities.
And then we have Friday’s eco data that is front and center – The August PCE report and what that might reveal about the direction of inflation and then the direction rates. In any event – gold is the ultimate ‘safety trade’.
Now it is 3 am – and I am writing this ahead of my appearance today with Maria on Mornings with Maria (from 6 – 9 am) – on Fox Business. So while they are a bit higher right now – that could and most likely will change. At 3 am – Dow futures are up 67, the S&P is up 10, the Nasdaq is up 60, and the Russell is up 3.
European markets are not open yet.
S&P closed at 6,656 down 37 pts… Eco data today includes Mortgage Apps – last week they surged by 29.7% – will we see another surge in apps today? (think lower mortgage rates). New Home Sales are due out at 10 am – they are expected to be down 0.3% m/m. Remember – 2 weeks ago Lennar reported that new home sales (for them) are not as rosy as they projected – and the stock has fallen by 14%, and that has taken TOL – 9.7%, KBH – 9%.
We have the possibility of a gov’t shutdown any day now – but I don’t view that as a real issue, because in the end – while they try to create all this drama around that possibility, they always seem to ‘make an 11th hour deal’ – I don’t go making investment decisions around what feels like an annual threat – neither should you.
We have 5 more trading days until the end of the month and the end of the quarter. By all accounts, it has been good for both – So far, we are up 9% for the qtr. and 3.7% for the month. I for one am surprised that we saw the strength this month that we saw, but there is always October!
Investing is exciting and frustrating at the same time. It’s about ‘the plan’ – make sure you have one. It’s about time in the markets, discipline, and risk management.
Pear/gorgonzola risotto
This is a great fall dish – you can use it as a first course or serve alongside a chicken dish.
For this you need: Carnaroli rice, 3 shallots finely chopped, butter, dry white wine (I use Pinot Grigio Santa Margherita), vegetable broth – warmed up, s&p, 3 Comice pears – peeled and cut up into bite size pieces, (those are the greenish ones), you can use Bosc if you prefer, Gorgonzola – room temp, rind removed and cut up walnuts. (you can smash them if you want, but I prefer cutting them).
In a heavy bottom pan – add 1/3 stick of butter and melt. Now add 2 shallots and sauté for 3 mins. Next – add in the pear pieces and sauté for another 5 mins. Remove and set aside.
In the same pot- over medium heat – melt another 1/3 stick of butter – add the other sliced shallot and sauté for 3 mins. Add the rice and stir to coat well – sauté for 4 mins.
Add in ½ c of white wine and allow the alcohol to evaporate.
Next – turn heat to med low and add in one ladle of the hot vegetable broth – enough to just cover the rice. Season with s&p. Let it cook uncovered until the broth is almost gone. Add another ladle – stir and let it cook – repeat until the rice is done but is not mushy. Maybe takes 15 – 20 mins.
Taste to confirm doneness – remove from heat and add in the gorgonzola cheese cut up into small (meltable) pieces. Stir vigorously with a wooden spoon to help melt the cheese into a creamy consistency. Next add back the pears and stir ‘gently” – Let rest for 1 min – serve in warmed bowls. Top with walnuts.
*Some people add parmegiana cheese – that is totally your call. I would let people add their own.