by Ivan Martchev

October 1, 2024

I am seeing the same type of trading in recent weeks that I saw in July, when marginal new highs were met with selling into strength, most notably in the technology sector. There is also rotation into the value part of the market, but progress in the last week has been slow. One cannot blame investors for taking profits at new all-time highs when the situation in the Middle East is fast changing and escalating by the minute.

No one knows where it will end, but it is safe to say it has not ended and that it may last for a while. The U.S. has ordered the families of embassy personnel out of Lebanon while commercial options are still available. The fact that commercial options may not be available soon says a lot about the dangers there.

This does not have to mean a large downside in the U.S. stock market, but it does suggest one shouldn’t look for the market to run higher or make anything more than marginal new highs before the election in early November. We could be in for a continuation of the trading range that started in the middle of July.

SPX-Chart-1

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It must be noted that there is a lot of support between the August and September lows, which may mean that the area of the 200-day moving average on the S&P 500 Index, which should be near 5300 in mid-October, would be a good area of support. We have not tagged that 200-day moving average yet this year and it seems to me that the Middle East situation rapidly escalating would be the perfect excuse to do so.

SP500

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As this chart shows, the two months before the election are usually choppy but September seasonality has not worked out according to the long-term averages this year, as only the first week of September was weak, followed by three up-weeks. Still, the fact that September will end marginally up is not necessarily a predictor of where October will end, given the unpredictable nature of geopolitical events. Octobers are weaker in election years, and there are plenty of reasons to see a market sell-off in October. If there isn’t one, that just means that the fundamental backdrop is a lot stronger than most investors had estimated.

Emerging Markets Are Finally on the Move

The one-two punch of the Fed rate cut and the Chinese government stimulus package is causing a surge in the MSCI Emerging Markets Index, which had badly under-performed developed markets this year and, more importantly, over the past 13 years. Last week was the largest up-week of the year, up 6.08%.

MCSI Chart-1

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The fact that the EOD index (above) hit a 12-month high should not worry anyone that they may have missed a big move because it is still well below its 2021 high and very well may have just started moving.

Emerging markets love a lower dollar, as it makes servicing their external debts easier, as they are dollar denominated. Also, the Chinese are hell bent on avoiding a recession and if their latest measures get the real estate market moving and the economy moving, this emerging market move is just beginning.

China is still stuck in deflation. The latest move aims to push the economy out of deflation and get it moving again. This is primarily a monetary stimulus worth between 1 trillion to 2 trillion yuan ($142 to $284 billion). By cutting banks’ reserve requirements, the PBOC releases a lot of money for new lending.

The PBOC will also allocate $71 billion to help state-owned enterprises buy shares, and $43 billion to fund corporate share buybacks. Unlike the Fed, the PBOC does not mind directly targeting the stock market. The PBOC is also directly targeting the real estate market by lowering rates on existing mortgages and lowering minimum deposits on second homes. Fixed-rate mortgages are primarily a U.S. phenomenon, and to the rest of the world, floating rates are the norm. In China, though, the PBOC has the power to target policy more directly to mortgages other than guiding overall market rates.

I doubt the Chinese can avoid a recession forever, but for the time being it looks like investors will give the Chinese government the benefit of the doubt as they have done so successfully for over 30 years.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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