As speculated in last week’s recap, the narrative changed abruptly over the weekend as Trump climbed down from his hostile rhetoric of the previous Friday, posting on social media “Don’t worry about China, it will all be fine!” Going full TACO, he referred to an “eternity” of time for discussions to make progress between now and his proposed 100% tariff imposition date of November 1st.
On the shutdown front and the data desert in particular, we learned that the CPI inflation report may be released on October 24th, but there was still no sign of the postponed Jobs Report for last month or even confirmation of any data-gathering taking place for the next one. As we entered the third week of this debacle, most federal workers went unpaid on Wednesday and chaos began to build at airports. The stakes are unquestionably getting higher by the day but betting markets continue to foresee a lengthy standoff.
Bond markets were closed for the holiday on Monday, but stocks were up and running and breathed a huge sigh of relief at Trump’s China flip-flop. After all, this is a $700 billion trading relationship. The indexes rebounded hard in New York to take a big bite out of Friday’s collapse. Further momentum was provided by Broadcom who became the latest firm to see their stock price jump on the announcement that they were leaping into bed with OpenAI.
Solid Q3 earnings reports and positive outlooks across the board from some of the big box banks on Tuesday were overwhelmed by China’s spiky response to Trump’s unstable and painfully obvious negotiating tactics. Wall Street didn’t like what it saw and stocks resumed their steep decline when markets opened, quickly giving back all of Monday’s gains.
In a major speech/Q&A, Fed chairman Powell skillfully walked the line between expressing inflation and employment concerns but the markets’ spirits were lifted by his perceived emphasis on a weakening labor market, which would imply further Fed Funds Interest Rate cuts in 2025 and stock prices roared back into the green before finally losing a bit of steam right at the end to finish slightly negative for what was a wildly volatile session.
Despite more US/China bickering (soybean and recycled cooking oil this time) including Treasury Secretary Bessent describing China as an untrustworthy partner and its chief negotiator as “unhinged”, stocks moved higher on Wednesday as more banks reported robust Q3 earnings and the announcement of a massive $40 billion+ data center deal involving multiple Big Tech/AI and financial firms.
The AI mega-trend seems to be alive and well according to Taiwan Semi Conductor (TSMC)’s sensational earnings report and forecast on Thursday. This helped juice a brief tech-driven spike in stocks to levels above where we were before Trump had his “100% China tariff” hissy fit the previous Friday and back to within spitting distance of more all-time record highs.
Enthusiasm swiftly waned, however, as we finally got a few earnings reports that failed to beat estimates and concerns grew about what JP Morgan’s Jamie Dimon called “cockroaches” in the private credit market and some rather disturbing real estate fraud revelations at regional banks Western Alliance (WA) and Zions. The indexes closed sharply lower, as did interest rates across the curve (see INTEREST RATES below).
Fears of any contagion in the banking sector seem somewhat misplaced right now as these incidents at WA and Zions look (for the moment at least) to be isolated and idiosyncratic, but Dimon’s “cockroaches” comment was hanging in the air as were other recent high-profile collapses (First Brands and Tricolor) and, as I have been banging on about for a while, with the indexes at these lofty levels it doesn’t take much in the way of potentially troubling news to cause Wall Street some agita and stocks stumbled out of the gate on Friday following down-sessions in Asia and Europe.
The anxiety didn’t last long however and the indexes recovered to close the day and the week higher as Trump called his own China tariffs “unsustainable”, his on-again/off-again meeting with premier Xi now looks like it might happen and Treasury Secretary Bessent will meet with his supposedly unhinged counterpart. Interest rates and the US Dollar continued to slide with the highly influential 10 year Treasury rate fleetingly dropping below 4.00%.
There were lots of news-driven big price swings last week but the background drumbeats are exactly the same. The US government remains shut down with no sign of any resolution, tariff chaos is alive and well, a Fed rate cut is still fully expected this month despite a lack of economic data visibility and AI exuberance remains intact. Absolutely nothing changed with any of these factors.
Indeed, if anything, AI enthusiasm is becoming a larger and larger reason that the market can afford to mostly ignore tariffs, labor markets, inflation, the shutdown and all the rest of it.
As long as the colossal level of AI capital expenditure endures, stocks can hold on. But AI is evolving into the lynchpin that is holding up markets and if doubts start to emerge about the stimulative power of AI for the entire economy, then investors may have to confront this less than ideal reality and sharp declines in stocks could result.
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ARTICLE(S) OF THE WEEK ..
Two great articles this week, I couldn’t decide which one was better, so here are both ..
Ritholtz’s Callie Cox: It’s the bull market’s birthday! But all everyone seems to be wondering about is if “the grim reaper is sitting at the door of the nursing home waiting for his next victim”.
“We are currently in the stage of the cycle where many people conjure up reasons for why gold is so attractive because they cannot bring themselves to admit that they mainly like it because its price has gone up a lot.” Always ask yourself with any investment, why do I own this?
.. AND I QUOTE ..
“Few things are as valuable in personal finance as a good b******t detector.”
Morgan Housel
LAST WEEK BY THE NUMBERS:
Last week’s market color courtesy of finviz.com
Last week’s best performing US sector: Real Estate (two biggest holdings: Welltower, Prologis) ⬆︎ 3.3% for the week
Last week’s worst performing US sector: Financials (two biggest holdings: Berkshire Hathaway, JP Morgan) ⬌ flat for the week
* SPY, a US Large Cap ETF, tracks the S&P 500 index, made up of 500 stocks from a universe of the largest US companies. Its price rose 1.7% last week, is up 13.4% so far this year and ended the week 1.4% below its all-time record closing high (10/08/2025).
* IWM, a US Small Cap ETF, tracks the Russell 2000 index, made up of the bottom two-thirds in terms of company size of a universe of 3,000 of the largest US stocks. Its price rose 2.4% last week, is up 10.2% so far this year and ended the week 3.7% below its all-time record closing high (10/15/2025).
* VXUS, a Global Non-US ETF, tracks the MSCI ACWI Ex-US index, made up of over 8,500 of the largest names from a universe of stocks issued by companies from around the world excluding the United States, in both developed and emerging markets. Its price rose 2.8% last week, is up 25.9% so far this year and ended the week 1.1% below its all-time record closing high (10/06/2025).
INTEREST RATES:
* FED FUNDS * ⬌ 4.125% (unchanged)
* PRIME RATE ** ⬌ 7.25% (unchanged)
* 3 MONTH TREASURY ⬇︎ 4.00% (4.02% a week ago)
* 2 YEAR TREASURY ⬇︎ 3.46% (3.52% a week ago)
* 5 YEAR TREASURY ⬇︎ 3.59% (3.65% a week ago)
* 10 YEAR TREASURY *** ⬇︎ 4.02% (4.05% a week ago)
* 20 YEAR TREASURY ⬇︎ 4.58% (4.60% a week ago)
* 30 YEAR TREASURY ⬇︎ 4.60% (4.63% a week ago)
Data courtesy of the Federal Reserve and the Department of the Treasury as of the market close on Friday
* Decided upon by the Federal Reserve Open Market Committee at periodic meetings 8x a year. Used as a basis for overnight interbank loans and for determining high yield savings interest rates.
** Wall Street Journal Prime Rate as of Friday’s close. Used as a basis for determining many consumer loan interest rates such as credit cards, personal loans, home equity loans/lines of credit, securities-based lending and auto loans.
*** Used as a basis for determining mortgage interest rates and some business loans
AVERAGE 30-YEAR FIXED MORTGAGE RATE:
* ⬇︎ 6.27%
One week ago: 6.30%, one month ago: 6.28%, one year ago: 6.44%
Data courtesy of Freddie Mac Primary Mortgage Market Survey
INTEREST RATE EXPECTATIONS:
Where will the Fed Funds interest rate be after the next rate-setting meeting on October 29th?
* Unchanged from now .. ⬇︎ 1% probability (2% a week ago)
* 0.25% lower than now .. ⬆︎ 99% probability (98% a week ago)
With two more Fed rate-setting meetings left in 2025, what is the most commonly-expected number of remaining 0.25% Fed Funds interest rate cuts this year?
* ⬌ Two (unchanged from a week ago)
Data courtesy of CME FedWatch Tool
All data based on the Fed Funds interest rate (currently 4.125%). Calculated from Federal Funds futures prices as of the market close on Friday.
PERCENT OF S&P 500 STOCKS ABOVE THEIR OWN 200-DAY MOVING AVERAGE:
* ⬆︎ 58%
One week ago: 54%, one month ago: 61%, one year ago: 79%
Data courtesy of MacroMicro as of Friday’s market close
This widely-used technical measure of market breadth is considered to be a robust indicator of the overall health of the S&P 500 index.
A high percentage (above 70%) generally suggests broad market strength and a bullish trend, while a low percentage (below 30%) may indicate market weakness and a bearish trend.
FEAR & GREED INDEX:
“Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffet.
Data courtesy of CNN Business as of Friday’s market close
The Fear & Greed Index from CNN Business can be used as an attempt to gauge whether or not stocks are fairly priced and to determine the mood of the market. It is a compilation of seven of the most important indicators that measure different aspects of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call option ratio, junk bond demand, market volatility and safe haven demand.
Extreme Fear readings can lead to potential opportunities as investors may have driven prices “too low” from a possibly excessive risk-off negative sentiment.
Extreme Greed readings can be associated with possibly too-frothy prices and a sense of “FOMO” with investors chasing rallies in an excessively risk-on environment . This overcrowded positioning leaves the market potentially vulnerable to a sharp downward reversal at some point.
A “sweet spot” is considered to be in the lower-to-mid “Greed” zone.
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