My Thought for Today - Wall of Worry

October 06, 2023

I was going through my final edits for this commentary and then the sacking of Speaker of the House Kevin McCarthy hit the newswires. That got me back to thinking about what to write. As you can see, news and markets move fast, and it takes a lot of thought energy just to keep up with the investing environment. Hence, on occasion my time is better spent managing risk rather than writing about it.

We have an adage on Wall Street that says, “Markets Climb a Wall of Worry.” Right now we are building that Wall of Worry. When we build that Wall, investors tend to react to the news in front of them. Hence, we had two difficult back-to-back months for the stock market in August and September.

What precisely are the bricks in the wall. There are plenty worth elaborating on.

Federal Government Funding

The Federal Government was close to running out of money to keep this country running. We endured a government shut-down angst a few months ago and then relived that last week. Over the weekend a “Continuing Resolution” was passed keeping the government funded for at least forty-five days. So we will have to revisit the Congressional shenanigans one more time this year. Parenthetically, per Bloomberg we have had 14 shutdowns since 1981, so these are not rare events. During a shut down, Social Security and Medicare payments are made. Additionally, military operations, air traffic control, and veteran’s medical care are still paid for. So, it’s not as bad as people fear. But they do anyway. Markets tend to have very large upside moves after the shutdown ends. All of this gets complicated after Tuesday’s removal of speaker McCarthy. Understand that McCarthy went through fifteen rounds of votes before being elected to the position back in January. To become Speaker, he made a deal with hardliners within his party such that he could be removed with just a single recall vote. That vote took place Tuesday, as eight members of his party voted to remove him. The good news is that this might force some fiscal discipline in Congress. The bad news is that McCarthy was willing to work with members on the other side of the aisle and compromise. He did so twice in budget talks and paid the political price.On a pain scale of 1 to 10, I rate this a 5 as its more political than financial.

UAW Strike

Auto production is a big industry not just in Michigan, but across the nation. This is a very complex situation. I normally would side with the employers but in this situation, the workers are in the right. Current union wages are not enough to absorb Inflation (more on that later) and they need a raise. Furthermore, the push to manufacture electric vehicles will take away union jobs as EVs require less labor to produce. I just think that the 40% wage increase that the unions are demanding is too much. We can afford a short-term UAW strike but a long-term one will have ripple effects across many industries. Actions by the UAW could also embolden other unions to strike. Large scale wage hikes could ensue and the worst of all inflation, wage inflation would compound the current price inflation we are absorbing. Just this Wednesday morning, 75,000 Kaiser Permanente workers walked off the job. This will disrupt healthcare facilities where Kaiser Permanente operates.On a pain scale of 1 to 10, I rate this a 6.

Fed Policy

The Federal Open Market Committee (FOMC) kept rates unchanged at its last meeting. However, there is much expectation that another (and perhaps final) rate increase will occur at its next meeting in about four weeks. What really spooked investors was Chairman Powell’s commentary of keeping rates high for a longer period of time. I do not think that the FOMC is seeing some of the fissures in the economy that other people notice. I strongly believe that the FOMC should accept a 3% rate of inflation rather than its traditional 2% target. Honestly, I always thought that 2% was arbitrary, so what’s so wrong with 3%? Tuesday the market got jolted by the JOLTS (Job Openings and Labor Turnover Survey) which reported stronger than expected jobs openings equating to strength in the job markets. This could be another sign of potential wage inflation. I’m on record as saying that Chirman Powell is incompetent – he’s the Anthony Fauci of economics. It’s the Peter Principle at work in government. Eventually the FOMC will come down from their ivory tower and see what’s really happening in the economy. When that happens, rates will peak and begin to trend lower. However, traditionally, the FOMC tends to move too far in one direction, and we are close to that point.

On a pain scale of 1 to 10, I rate this a 7.


The big lie is that price (or supply-demand) inflation is coming down. No that’s not true. Inflation is just rising at a slower pace. Since the beginning of 2021 core inflation (excluding food and energy) is up about 18% and we still have a few months to go in 2023. So while in 2023 core inflation was 3.0%, with still four months to go in 2023, that 3-year inflation rate is going to be slightly more. Another lie has to do with excluding food and energy prices, which is nothing new but in this environment is only exacerbated. That inflation is hitting consumers right in their wallets when they shop for food or get fueled up at the pump. Why has inflation been rising at such a fast clip? Two reasons – government spending and energy policy. Crude oil was cruising toward $100/bbl. last week and seems to have cooled down below $90/bbl. We need to get that back to the $70s level. On a pain scale of 1 to 10, I rate this 8.

Failed Washington Policies

President Biden’s approval rating on the economy is about 36-40%. I’m not being partisan, just look at the data compiled by CNN is reasonable given how his polices and economic agenda are just not working. The Inflation Reduction Act did not reduce inflation. It was primarily a clean energy bill. There is nothing wrong with green energy, but we need an evolutionary policy rather than government mandates and reliance on foreign energy supply. Eliminating drilling and mandating electric vehicle output is just not going to get us where we want to be. Foreign policy is a mess, and we can only fight a proxy war in the Ukraine for so long. Again, being non-partisan, read this CNN article on aid to Ukraine. The issue I have is not with helping the Ukraine in its war with Russia, we should, but why the US seems to be footing most of the bill is problematic.

On a pain scale of 1 to 10, I rate this an 8.

What To Do Now As Investors?

The best way to combat inflation is via technological innovation. That means putting more capital into more aggressive Growth sector stocks. Growth can be volatile but over the long term it pays off. With the 30-year US Treasury hovering around 5% and the 10-year US Treasury around 4.75%, the advantage Dividend stocks had over bonds has disappeared. I don’t typically advocate buying into long-term bonds because you are locking in sub-stock returns for the long run. Remember that stock indexes in the form of the S&P 500 return historically over 8% on a long-term average basis.

So here is what to do. Shift some money from Dividend to Growth stocks as I think the trade benefiting Dividend stocks for the past few years is over with for the near future. If you have idle cash, buy T-bills going out no more than a two years. Once we get over this inflation hump, the consumer will display their resilience once again. So, we will look for opportunities in the Consumer Discretionary sector. Consumer staples and utilities, which tend to be the dividend safety stocks, are to be avoided.

I think that you can raise your allocation to AI (Artificial Intelligence) and cyber security stocks. Did you see what happened to MGM (MGM) when it failed to pay cyber hackers ransom money? The company’s operations were shut down for nearly two weeks. That is why we are picking up CrowdStrike (CRWD) after selling off recently. Also, we bought Meta (META), the company formerly known as Facebook as it migrates toward AI and away from social networking.