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As widely expected Federal Reserve policy makers left interest rates unchanged while saying the argument for higher borrowing costs strengthened further amid accelerating inflation, reinforcing expectations for a hike next month.

In my view perhaps the greatest change in yesterday’s post meeting statement is that inflation is on track to reach their 2% target, omitting the much known phrase “inflation would probably remain low in the near term.”

I ask are inflationary expectations beginning to rise?  As noted many times, inflation is a two part phenomena; a monetary and psychological component defined as too much money chasing too few goods fearing higher prices tomorrow

How will a December increase affect equities given the markets are now completely dominated by cross correlated technology based trading models where interest rates are the largest variable.

The other day Laurence Fink, CEO of the largest asset manager, commented “equities are no longer being bought for fundamental value but rather purchased indiscriminately based upon market capitalization.”

Wow!  Against this backdrop I cynically ask why are a gazillion people registered for the three year CFA program since fundamental security analysis is no longer required?  The path way to riches is not study and analysis but blindly buying the largest companies in an index.

As noted above, interest rates are the largest component of cross correlated trading models that is about 90% of the market volume, volume focused in the largest capitalized companies.  It is no wonder why the majority of bulge bracket firms are universally bearish forecasting between a 5% and 20% drop in equities.

And now onto the election.  Yesterday Bloomberg reported that over 370 “blue chip economists” are stating that a Trump victory will be bad for the economy and the stock market.  This headline reminded me of a similar headline in June when the vast majority of British economists and CEOs of the largest companies warned about Brexit, warning of an economic disaster.

Britain’s economy expanded in the third quarter by a 0.5%.   Consensus had expected a nominal decline.

While it is too early to write Britain’s establishment was sensational, I do think it is of great significance that American small business owners are the most uncertain in 42 years.  Many are exhausted from the last eight years where regulations increased exponentially, fearful of another 4.  I think it is of considerable significance that small business owner’s support Trump by a 2:1 margin.  Wow!

As widely known, according to the BLS 90% of the jobs growth from 1996-2007 was from small business, defined as companies who employ 499 people or less.

In many regards job creation has been anemic given the four decade low of the labor participation rate (LPR).  As commented many times if the LPR was around 2007 level, the unemployment rate would be around 10% not the stated rate of 5.0%

Speaking of jobs, tomorrow the October labor report is released.  How will the data impact the markets?  Or will all be myopically fixated on the election?

Commenting briefly on yesterday’s market activity, the Dow was down about 0.40% while the NASDQ slid 0.75% on interest rate fears.  Three of the five largest S & P companies are NASDAQ listed companies, shares that are vastly over owned and are most at risk to an increase in interest rates.  The 10-year was up 8/32.

Last night the foreign markets were up.  London was down 0.23%, Paris up 0.71% and Frankfurt up 0.16%.  China was up 0.84%,  Japan down 1.76% and Hang Sang down 0.56%.

The Dow should open nominally higher following seven days of consecutive losses.  The 10-year is off 3/32 to yield 1.83%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.