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TL;DR

  • Fed chairman Jerome Powell announced a 0.75 percentage point increase to interest rates, but suggested that the pace of the hikes may slow
  • Peak interest rates are now expected to be even higher than before, and could hit almost 5%
  • October jobs figures were released Friday and they were surprisingly good, beating expectations by 30%
  • Top weekly and monthly trades

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Major events that could affect your portfolio

Another week, another round of comments from Fed chairman Jerome Powell taking a baseball bat to markets. I mean, we can’t blame the guy, right now he’s got a tougher job than Elon Musk’s PR rep. Inflation remains super high, and yet increasing rates to bring it down could also take down the economy with it.

It’s this dilemma that led to some decidedly mixed messages from the Fed this week.

As expected, interest rates were increased by 0.75 percentage points, in line with most analysts’ projections. The most interesting part of the announcement was Powell’s comments after the release. He stated that the pace of rates would likely have to slow down and that this could happen as soon as the next meeting.

However, he also said that the Fed now believes that interest rates will peak higher than originally expected and stay higher for longer. Given that the previous projections had peak rates hitting 4.50 – 4.75%, this means we could see rates nudging 5% in this rate cycle before they start to head back down.

It’s this second part that saw markets give up some of their gains in what has been a strong month, with the S&P 500 down -4.64% for the week at Thursday’s close.

While the aim with the Fed’s new plan is to limit the damage and attempt a ‘soft landing’ for the economy rather than a crash, markets are understandably nervous about the prospect of a long, drawn out recession.

Regardless, the Fed may not have that choice if the latest jobs figures are anything to go by.

Despite all that, the US economy refuses to lay down and let a recession happen. The latest jobs report dropped Friday morning and it’s way ahead of expectations. According to the US Bureau of Labor Statistics there were 261,000 new jobs added in October, a 30% jump on the 200,000 consensus projection from Bloomberg.

Unemployment was up slightly but still remains at historically low levels at 3.7%. In contrast to all the negative messaging and the constant talk of a pending recession, this level of unemployment is one of the lowest experienced in the past 50+ years.

Wages also grew strongly in October by 0.4% which was higher than the 0.3% that had been projected.

While this is good news for the economy, it potentially throws cold water on the comments from Jerome Powell about slowing the pace of rate hikes. If the rapid rate increases haven’t yet been able to slow economic growth and bring down inflation, the Fed is unlikely to be able to justify pulling back.

We’re likely to see large hikes persist until either inflation or economic growth data begins to turn around.

Stock markets liked the news, with the S&P 500 up around 2% in early hours trading and the NASDAQ Composite higher by around 1.8%.

This week’s top theme from Q.ai

With a recession looming on the horizon and looking more likely by the day, investors look to ‘recession-proof’ industries that may be able to weather the storm. Like it or not, ‘sin stocks’ or what we like to call guilty pleasures, tend to be very recession resistant.

That’s not to say that they can’t go down or won’t experience volatility. If the overall market is crashing, guilty pleasures companies are likely to still feel the hit, but they might just hold up a little better than others. That’s because demand for things like alcohol and tobacco don’t tend to change during a recession.

In fact, sometimes demand can actually go up when other forms of leisure and entertainment are out of financial reach.

Our Guilty Pleasures Kit uses AI to predict the performance of sin stocks across five areas, rebalancing the Kit based on the projections for the coming week. The verticals we look at are alcohol, tobacco, cannabis, gambling and “love”.

Our AI re-weights the positions in the companies within this Kit based on the sectors and individuals stocks which are expected to perform the best. Examples of the kinds of companies you’ll find in this Kit are Caesars Entertainment, British American Tobacco, Playboy and Tilray Cannabis.

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Right now, this Kit is having a moment. Monthly performance for October was 14.20%, showing that it’s possible to enjoy guilty pleasures without necessarily having to deal with a hangover the next day.

Top trade ideas

Here are some of the best ideas our AI systems are recommending for the next week and month.

Resideo Technologies (REZI) – The smart home company is one of our Top Buys for next week with an A rating in our Quality Value factor. Earnings per share was up 29.7% in the 12 months to October 1st.

Heartbeam (BEAT) – The digital healthcare company is one of our Top Shorts for next week with our AI rating them an F in Quality Value and Low Momentum Volatility. Net income was -$8.94 million in the 12 months to the end of June.

Asgn (ASGN) – The IT services company is one of our Top Buys for next month with an A rating in our Quality Value factor and in Technicals. Earnings per share increased 20.5% in the 12 months to September 30th.

Pineapple Energy (PEGY) – The residential solar company is one of our Top Shorts for next month with our AI rating them an F in Low Momentum Volatility. Net income was -$3.34 million in the 12 months to June.

Our AI’s Top ETF trade for the next month is to invest in silver, crude oil and Latin America and to short the S&P 500 and short term bonds. Top Buys are the United States Brent Oil Fund LP, the iShares Silver Trust and the iShares Latin America 40 ETF. Top Shorts are the iShares S&P 500 ETF and the Vanguard Short-Term Bond ETF.

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