War Is Horrible, Don't Sell, Buy Big And Small Tech, Defense Too

War what is it good for? Absolutely nothing...

There is no denying that war leads to misery and innocent suffering. I state this without making a more nuanced statement because that isn't the purview of Seeking Alpha, nor is it why I write this weekly commentary on the stock market. So leaving moral and geopolitical questions aside, it is rare for a war where our soldiers are uninvolved to affect our markets. Even Putin's War only affected our financial markets indirectly by interrupting the sale of wheat and corn driving up the price of food, and pushing our inflation issues here higher. Oil went up as well, but that was more Opec+ which includes Russia limiting the supply of Oil to the world.

The effect will be temporary

I remember the Iraq war and how it rattled markets and the soaring price of oil as the days dragged on while the US military set up for the invasion of Iraq. The moment the invasion started the market rallied very strongly. In our case, the selling has been relatively mild and the rally will likely not be a rip to new highs.

From Barron's:

Seasonality suggests that stocks should be starting to rally right about now. The S&P 500's strongest period begins on the 197th trading day of the year - Oct. 13 2023 - and extends through year-end, notes Jay Kaeppel, senior research analyst at SentimenTrader. Over that period, the S&P 500 has risen 70% of the time going back to October 1953, with an average gain of 6.8% when it has risen."

That doesn't mean buying right now or even holding on to positions underwater are going to be easy

I realize it will take courage, to hang on, even as a lot of stocks fell hard last week. We could see markets further panicking this week, here are some sundry reasons why:

• There still needs to be a Speaker of the House. Without a Speaker, no bills can transpire even if there is an emergency. This is more than just a figurehead for the party in control. The speaker is second in line to the presidency. This is a minor weight on animal spirits now, but it could be the proverbial last straw
• The Hamas War could spread into a regional conflict that could bring speculation that the US will get involved kinetically. I think the US is blustering here, and will stay out of it
• The US could bring special forces to rescue US kidnapees. This is a real possibility, yet extremely fraught. Of course, I hope for success. I don't want to sound clod-blooded but I don't think this will move markets
• On a more mundane plane, this week starts earning season, and much is riding on the notion that earnings will start growing again. Revenue growth is a "nice to have" but earnings is where the focus is right now

I believe the market overcomes the gloom

For the most part, all these issues are temporary, and many of these items have the ability to be addressed in a positive way. The House can vest the Speaker Pro Tempore Patrick T. McHenry with full powers albeit on a temporary basis, I think the market will cheer that. Q3 earnings can continue to provide upside surprises, as the banks may continue to do better than feared. The US sent another carrier group to the eastern Mediterranean as a show of force that will hopefully stymie belligerence from up north. For me, the setup is the powerful seasonal momentum for the market and the conviction that the Fed is done. Most importantly the current level of rates are "normal". A 10-year bond at just under 5% will likely be the top for quite a while. That does mean that eventually, the 2-year bill will have to retreat a bit in 2024. I could be a bit off, perhaps the 10-year does approach 5% to 5.25% by year-end.

Once again I say the economy can handle a 5% interest rate

However, it will be because the economy remains strong, not inflation. I believe inflation, despite the slightly warmer results this week will continue to cool as more workers take up jobs. Consumption will find its level as excess money pumped into the economy from years ago is finally consumed. The play money will dry up, but with so many people employed, I think it will balance out and the economy will continue to grow...

That does mean that services like travel and entertainment will still have demand, products probably less so. Perhaps salaries will find a lower level now that there are more workers available for those industries. Productivity will rise and help moderate inflation as well. I have said this before but it bears repeating this level of interest rate feels high because we have lived in a zero-interest-rate world for so long. This level of debt caused large distortions in our economy, and now that we have the right level, I think it is actually supporting growth. This is counter to what the Fed wants but it is obvious to anyone willing to look. Yes, housing is too expensive with a nearly 8% mortgage, yet, a higher mortgage will eventually bring down home prices. Also, there needs to be a willingness for cities and suburbs to make it easier to build homes, and that is not something the Fed has control over. I have digressed.

Let me get to the point, while the news flow has been very discouraging, and downright tragic I urge you not to sell. If you've bought the large-cap tech names I listed last week hold onto your Amazon (AMZN), Alphabet (GOOGL), and Nvidia (NVDA). I would look to add other names like ServiceNow (NOW), Adobe (ADBE), and Intuit (INTU). These are all well-known large-cap names, I have been also adding Palantir (PLTR), Nutanix (NTNX), Datadog (DDOG), Oracle (ORCL), and Confluent (CFLT). I like tech because enterprise spending on the cloud is only accelerating and names from ORCL to GOOGL and of course, NVDA are getting AI development dollars. This also goes for NOW and Adobe but more on the applications side. Any corporation even of moderate size has to be more productive with the workers they have and technology will get them there. All of these names are focused almost exclusively on large corporations except INTU and ADBE. Tech that enables small companies is also going to grow strongly like BILL Holdings (BILL), DocuSign (DOCU), and Zoom (ZM).

I don't have to justify the demand for aerospace and defense stocks

You could throw a dart at the defense names and do well right now. A lot of them are way below their 52-week highs. You might want to go with the Defense and Aerospace ETF (ITA). At this point, if you haven't lost complete patience with Boeing I think it is still worthwhile to maintain a position. They are a huge defense contractor, and you are getting the airline business practically for free, GE aerospace (GE) is a great investment too, as they will be spinning off the power generation business in '24. if you believe in green energy, they have huge wind turbines for offshore power. Personally, I would just hold onto the jet engine business as it should throw off oodles of cash. I have two lesser-known defense names that I like L3Harris (LHX) and AeroVironment (AVAV), LHX just acquired Aerojet Rocketdyne, and they make the solid rocket engines that drive the anti-tank missiles. This is in huge demand and LHX has the resources to scale up that business as demand currently is outstripping supply. The demand for anti-tank, air-defense, air-to-air, and ground attack rocket engines is going to be sustained for a decade at least. LHX is not as large as the usual prime defense contractors but I believe the defense department wants more competitors. I think they will encourage LHX to increase in size to become a real competitor in the coming years so I am a long-term investor here, actually, I am a long-term investor in nearly all the names I've mentioned today. AVAV is a perfect way to end the defense discussion, they make the very deadly switchblade loitering munition. Demand for the switchblade has been on the rise since getting permission to be sold to NATO allies. AVAV is a leader in drones and military robotics and is the future of defense. Maybe these two companies should merge, just a thought.

Let me summarise…

The events of last week and this coming week have been and are going to be upsetting. I personally can no longer scroll through all the tragic videos, on social media. That is enough to turn anyone off from investing or trading in the market. I get that. That said, stocks always climb a wall of worry, and if you have funds to invest, now is likely a very good time to put that money to work. I think the House of Representatives does get its act together, and that the possibility of a true regional conflict will subside. I think that the bullish season trend will be in effect since seasonal trends have been so strong throughout this year. Also, there are a lot of great tech names that are well off their highs and should be bought. That said, I think GOOGL is going to continue to make new highs, the same goes for AMZN. Use the volatility to your advantage NVDA could drop 20 points, so bide your time. Study the charts and look for support levels, this week could cause some panic selling that could press some of these names down to bargain levels. Finally, this week really starts Q3 earnings, often stocks are sold off for shoddy reasons. That could be our opportunity to pounce as well. An innumerable number of publications publish who will be reporting this week. Go through and see if there are any that you consider worthwhile if only they were priced low enough. Make a list with the prices you want, and take your shot. It is times like these that offer opportunities to really boost your returns.

Good luck!

Have you ever bought a stock that everyone's saying is great, only to find you bought near or at the all-time high that stock dropped 20% immediately? What happened? By the time the average stock purchaser gets a stock idea, usually, it's already overbought.

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