Port Strike Threatens Economy, Inflation Battle and Pace of Fed Cuts
Middle East tensions mount as Israel moves into Southern Lebanon
It’s official, September did not follow its historical pattern and we saw an overall positive month with the S&P 500 notching a 2.02% increase, while the Nasdaq Composite added 2.65%. The big winner over the past quarter? The basket of 30 stocks better known as the Dow Jones Industrial Average (8.21%), which for some reason is still more often referred to on nightly broadcasts despite the S&P 500 being a far better barometer of the stock market. We can attribute that outsized performance to the Fed embarking on the expected monetary policy recalibration mid-September and China’s signaling for further stimulus to prop up its sagging economy.
As we kick off the final quarter of the year, one that, as we see in the above chart, has typically been positive for stocks, there are a few headwinds that could challenge the market’s typical path. Yesterday, Fed Chair Powell shared that the recent half percentage point interest rate cut shouldn’t be interpreted as a sign that future moves will be as aggressive and reiterated the Fed isn’t on any pre-set course with further cuts. With the Fed balancing continued progress on inflation with supporting the labor market, we expect investors will dig heavily into this week’s array of August and September employment market comments and data.
That begins today with job creation findings in both the September Manufacturing PMI reports as well as the August JOLTs report. Those initial indications will be supplemented by tomorrow’s September ADP Employment Report, Thursday’s September Service PMIs, and of course Friday’s September Employment Report. Once again, bad news in the form of weaker than expected hiring indications is likely to be viewed in a positive light for rate cuts and that could give the market some additional lift.
Other headwinds that could alter that course include the port union strike that saw 50,000 longshoremen walk off East Coast and Gulf Coast ports. This is the first major strike for these ports in some 47 years and estimates put between 43%-49% of all US imports and billions of dollars in trade moving through those ports. This will have an impact on supply chains and the US economy but the size of that impact will hinge on the duration of the strike. Because the International Longshoreman’s Association (ILA) rejected an offer from the port management group USMX on Monday that included a 50% wage hike over six years, it’s possible the strike may not be a short one.
The current thinking is a disruption of one to two weeks will have modest consequences but a longer strike will be far more disruptive and risk upward price pressures. Should a long strike come to pass, it could be a major headwind for the holiday shopping season as well as the auto and food industries. A modest reacceleration in inflation pressures could result in the Fed being more cautious about future rate cut timing, potentially weighing on the market.
On top of that, geopolitical tensions in the Middle East continue to rise, adding even more uncertainty into the mix. Israel has sent soldiers into Southern Lebanon, raising the risk of a wider regional conflict. US, European, and Arab states have called for restraint and concerns are for a protracted fight and the creation of a long-term “security zone”, something that could risk a wider regional war involving Iran.
For times like these, we have the Market Hedge model in our model arsenal.
As we get ready for the day ahead, we’d also note today’s data, which includes the August Construction Spending report, a potential catalyst for our Rebuilding America and Homebuilding & Materials models.
Model Musings
Aging of the Population
“More than a third of working baby boomers and half of Gen Xers have accumulated less than $100,000 in retirement savings, and most workers expect to delay retirement because it has been too challenging to save, according to Goldman Sachs Asset Management’s 2024 annual report on retirement trends.” Read more here
Artificial Intelligence, Digital Infrastructure
“Developments in artificial intelligence (AI) are moving so fast that it’s hard to tell what might be coming around the next corner. But there’s one thing that everyone seems to agree on: at some point, AI will shift from training to inference, with machines talking to machines – and that’s going to be a complete game changer. ‘When AI starts to talk to AI, we really think that's going to represent another fundamental shift in the volume of data required to run businesses that represents another step function change in terms of opportunity for this company…’” Read more here
Cash-Strapped Consumer
“BNPL is gaining traction as a preferred payment method, with 16% of U.S. consumers abandoning traditional payment methods in favor of BNPL solutions. This trend is particularly pronounced among millennials, with 39% reporting they used BNPL in the past year. The surge in popularity is underscored by a 28% year-over-year increase in gross merchandise volume for BNPL purchases through a single service, indicating its effectiveness in driving sales.” Read more here
Cybersecurity
“A recent glitch found in Kias has highlighted cybersecurity vulnerabilities in connected vehicles. According to a report from the cybersecurity publication Dark Reading, the flaw was found earlier this month by independent researcher Sam Curry while he was conducting follow-up research on other vehicles. That research, the report said, showed how anyone could take advantage of the vulnerabilities in basic vehicle commands to take over an owner’s account and lock them out of managing their own car.” Read more here
Digital Infrastructure & Connectivity
“More than 100,000 Verizon customers were without service Monday, according to reports that began coming in to Downdetector 9 am ET. The reports peaked at 11 am and declined afterward, but remained at roughly 50,000 reports at 1 pm. Chicago, Phoenix, Los Angeles and other locations saw the greatest number of reported outages, according to Downdetector.” Read more here
“Verizon Communications Inc. (NYSE, Nasdaq: VZ) and Vertical Bridge today announced they have entered into a definitive agreement for Vertical Bridge to obtain the exclusive rights to lease, operate and manage 6,339 wireless communications towers across all 50 states and Washington, D.C. from subsidiaries of Verizon for approximately $3.3 billion, including certain commercial benefits. The transaction is structured as a prepaid lease with upfront proceeds of approximately $2.8 billion in cash.” Read more here
Nuclear Power & Uranium
“The Palisades nuclear plant in Michigan has closed a $1.5 billion loan to support the first reactor restart in U.S. history, the Department of Energy announced Monday. Palisades’ owner, Holtec International, hopes to restart the plant in the fourth quarter of 2025, subject to approval by the U.S. Nuclear Regulatory Commission.” Read more here
The Strategies Behind Our Thematic Models
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
Cash Strapped Consumer - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Cybersecurity - Companies that focus on protecting against the penetration of digital networks and the theft, ransom, corruption or destruction of data.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Digital Lifestyle - The companies behind our increasingly connected lives.
Digital Payments - This model focuses on companies benefitting from the accelerating structural adoption of digital payments and financial technology (FinTech).
EPS Diplomats - Profitable large capitalization companies proven to produce above-average EPS growth and provide investors with the benefit of multiple expansion.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The Strategies Behind Our Dividend Income Models
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.
Don’t be a stranger
Thanks for reading and if you have a suggestion for an article or book we should read, or a stream we should catch, email us at info@tematicaresearch.com. The same email works if you want to know more about our thematic and targeted exposure models listed below.