The best way to describe the stock market in 2018 is resolute. There has been an undercurrent of resolve fueled by an Economic Renaissance, and a renewed sense optimism that’s affecting all economic levels of society. 

Friday’s session was a microcosm of that resolve as the Dow Jones Industrial Average climbed off the canvas three separate times to close in the plus column:

• Italy’s budget announcement was a clear dismissal of the European Union (EU) protocol
• Facebook (50 million users) database security breach
• Senator Jeff Flake turned Washington on its ear

Overall, it was a monster third-quarter for stocks, with the S&P 500 enjoying its best quarter since 4Q13.

• Dow: +9.1%
• S&P 500: +7.2%
• NASDAQ: +7.2%

I know the naysayers are trying to dismiss the rally and suggest the market has been sideways or too dumb to be afraid. Remember: the market was supposed to be lower, even crash now for a variety of reasons:

• The tariff wars
• Higher yields
• Flatten yield curve
• Seasonal weakness

What I find most amazing isn’t the action in the stock market; it’s Main Street, which gives mixed signals on its opinions about President Trump approaching a level of economic optimism never seen in the country before.

Movin’ on Up

Well we're movin on up, To the east side.

To a deluxe apartment in the sky.

Movin on up

To the east side.

We finally got a piece of the pie.

-TV Theme Song, The Jeffersons

Taking a deeper look at the Michigan Consumer Sentiment Survey, it underscores the lower income brackets that finally feel like they are getting a piece of the action. That’s right. The lower one-third of income earners have seen the sharpest increase in enthusiasm after the top one-third peaked in February.

• Lower one-third = 96.3: the highest level since November 2000
• Top one -third = 103.8: down 8.1 percentage points since February

What does it mean?

This divergence across income subgroups has been observed in past economic cycles and indicates that the expansion has now benefitted nearly all population subgroups.

Consumers anticipated continued growth in the economy, an even lower unemployment rate and gains in their own finances during the year ahead,” Curtin said. “While some declines were recorded among higher income households, the outlook for consumer spending is still quite favorable.

-University of Michigan

Consumer Attitudes

• 44% see improved finances in the year ahead (highest since 2005, the record, 49% in 1998)
• 56% saw finances improve (record 57%, March 2018, and February 1998)
• 44% saw higher income (record 51%, February 1953)

Consumer Plans

Consumers are optimistic about buying conditions for homes, vehicles, and durable goods, mostly because of job certainty and income prospects.

There will be low prices ahead of anticipation of higher inflation and prices, especially in driving and in buying.

Bottom Line

Americans are pumped about their own finance, ignoring all the noise and all the politics. Many are seeing opportunities they gave up on a long time ago. That’s great news for everyone.

Answering the Big Question

Coming into the quarter, the big question was whether the market could rally without leadership from a handful of Big Tech names. Well, investors found safety and opportunity in Health Care (HLV), the value in Industrials (XLI), and momentum in Consumer Discretionary (XLY) names.

S&P Sector 3-Month Performance	Symbol	Change
Communication Services* *(Ony trading for 1 week)	XLC	+0.8%
Consumer Discretionary	XLY	+7.2%
Consumer Staples	XLP	+4.5%
Energy	XLE	Unchanged
Financials	(XLF)	+3.7%
Health Care	XLV	+13.9%
Industrials	XLI	+9.4%
Materials	XLB	-5.6%
Real Estate	XLRE	-0.3%
Technology	XLK	+9.4%
Utilities	XLU	Unchanged

 

The session also saw investors bailing out of hot stocks into other stocks instead of the sidelines. 

Tesla (TSLA) shares were hammered from the news of the U.S. Securities and Exchange Commission (SEC) charges against Elon Musk. However, reports state he was offered a pretty sweet deal to stay on as CEO by giving up the chairman title.

I understand where Musk is coming from with respect to fighting the shorts. In fact, his pugilistic approach to life is what got him to this point where he transcends business. Moreover, the shorts are relentless and very powerful, and many would like to put his company out of business.

It’s hard, time-consuming, and expensive to fight the SEC. 

With that in mind, Musk cut a deal with the SEC over the weekend.

I knew there would be a deal soon. Even though it cost Musk the chairman title and $20.0 million bucks (another $20.0 million for the company), he will make it up big time on a rebound in the share price.  Furthermore, I think the company moved quickly; when production numbers and earnings are released, there shouldn’t be any clouds to stop a potential massive short squeeze.

I’m glad Musk saw his own self-inflicted wounds and ignored his pride to keep his eyes on the prize. I’m rooting for him to beat the shorts, and to beat all those in the financial press rooting for his demise.

Red-Faced

Fast money investors are also feeling the pain in Facebook (FB) with their disappointing earnings report that’s still lingering. The company lost the Instagram founders, and now this data breach. Facebook has serious issues that go well beyond a data breach.

Intel Inside

Perhaps the most meaningful news for investors on Friday was guidance from Intel (INTC), which was beginning to lose its luster as a pillar of tech. The company announced it will invest a record $15.0 billion in capital expenditure this year, as demand has already seen the company hike its own revenue forecast by $4.5 billion.

Nvidia Unbound

The news sent the Technology (XLK) sector higher, although the biggest winner was Nvidia (NVDA), rallying more than 5% after Evercore (EVR) raised its share price target to $400 from $300. It was only a few weeks ago that analysts were complaining about the company not living up to the hype.

This Week

This week, we get a ton of economic data culminating on Friday with the employment report, which is expected to report 200,000 Americans got jobs in September. It has already taken us one month and a quarter to remember this, but we might learn it was even better than reflected in the stock market.

Try to ignore the Washington, D.C. shenanigans, and let’s focus on making money.

Today’s Session

The U.S., Mexico and Canada trade agreement (USMCA) is in place and looks like a win-win for the United States, Mexico and Canada.   It really is huge in the sense it’s fair to American farmers, auto workers, and provides protection and rules for financial services and digital commerce.

Would need a monster session to get all the major indices to new highs today, but we could see a series of new records set this week as we finish with the jobs report.

• S&P 500 293.94
• NASDAQ 8,133.30
• Dow Jones Industrial Average 26,769

Comments

Right on,right on,right on----------That's Right! John C. on 10/1/2018 11:58:09 AM

I find it unusual that the sentiments of the upper third and lower third are moving in different directions. My sense of how this progress is that people make money when other have that additional to spend, so if the lower third have additional wealth then the upper third should benefit from it. Unless of course, the upper wealthy is being transformed, some may be dropping out and new wealth earners are making it up into the upper echelons... Andrew Newallo on 10/1/2018 3:27:49 PM

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