MONDAY MONEY / HOW GOES STOCK MARKET AMID THE HUMAN HURRICANE

Weekly Market Wrap: Market jolts shouldn't be too scary 

GUEST BLOG / By James McCann, Senior Economist, Edward Jones Company. 

KEY TAKEAWAYS 

--Global markets were hit by another bout of volatility last week, with equities again finishing lower in a choppy week, continuing the worst run since the tariff driven sell-offs in April*. 

--The weakness in part reflects concerns over the technology sector, with a solid earnings report from NVIDIA unable to stifle the correction emerging across these companies as investors appear to take profits amid ongoing bubble chatter. 

--Meanwhile, ambiguity over the Fed's next steps is unhelpful, with the central bank continuing to struggle to get a clean read on the economy due to shutdown-driven data disruptions. 

--A correction in the buoyant market looked overdue, in our view, and we think investors should not overreact to the November setback. However, we believe recent moves underline the importance of a diversified portfolio in the current environment. 

--Lower entry points could provide an opportunity for investors, especially as the real returns on cash and bonds appear to dwindle. 

There is an old cliche in the movies - "It's quiet, a little too quiet." This probably describes how we had felt about equity markets over recent months during a remarkably steady 40% rally in the S&P 500 from April lows*. As is typical in films, this relative quiet has been rudely interrupted by a spike in volatility through November, which has so far triggered a 3% reversal in this benchmark*

We can point to a couple of plot twists driving this upheaval. First, the boom in AI stocks, which had helped power large-cap equity-market gains, is looking vulnerable, with investors booking profits as concerns grow over valuations and a potential bubble*. Second, there is increasing uncertainty that the Fed will swoop in with rate cuts to help sooth markets*. 

 To stretch our analogy perhaps uncomfortably far, we don't think this is the end of the show. Spikes in volatility are normal in equity markets, and we think even less surprising given the speed and scale of recent gains. A reset in expectations might be a healthy dynamic, in our view, and present an opportunity for investors to put cash to work and diversify portfolios. 

 AI stocks remain under pressure 

 The so called Magnificent Seven mega-cap tech companies have had a tough month. In market-capitalization-weighted terms, this group is down close to 6% in November so far, pushing large-cap markets, and in particular the tech-focused Nasdaq index, lower*. 

 We wrote in last week's wrap that the market appeared ripe for profit-taking following an extraordinary run, particularly as concerns start to build around froth in the tech sector. There looked to be further evidence of these dynamics this week around the much-anticipated NVIDIA third-quarter earnings report. 

At first glance the results were solid. Sales estimates for the third-quarter were stronger than expected, guidance for this quarter was revised higher, and there were bullish signals that the company could exceed the $500 billion uplift in revenue projected over 2026*. 

 However, after an initial rally in NVIDIA stock helped drive a 1% bounce in the S&P, we saw a swift and sharp reversal in sentiment that pushed markets lower*. Since 1957 we have only seen eight instances in which an opening rally of this magnitude has closed in the red*. 

 There might be a couple of factors driving this disappointment: 

-- First, while sales-growth projections remain strong, these are expected to slow in coming years, potentially closing the run of exponential-feeling growth in the sector*; and 

--Second, despite NVIDIA CEO Huang's attempt to push back on the AI-bubble narrative, the market is seemingly increasingly uneasy over the sustainability of current investment rates and their long-term payoff*. 

We flagged last week that certain tech companies are starting to build leverage to finance AI investment and shifting to more asset-heavy business models**, posing risks to margins and free cash flow. On this theme, we saw a further rise in the CDS spread - a measure of credit worthiness - for Oracle this week, a potential gauge of these worries*. 

 Despite these changes - and what looks to be a broader uncertainty around the long-term payoff from AI investments - we don't think investors should overreact to the wobble in short-term sentiment around the sector. Mega-cap stocks have consistently delivered strong earnings growth, the near-term investment outlook remains robust, and valuations, while elevated, do not look stretched to extremes as seen in the lead up to previous bubbles*. However, we think further sentiment- or valuation-driven setbacks are likely possible, despite these still strong-looking fundamentals. 

 Foggy conditions for the Fed 

Alongside booming AI stocks, one of the themes helping drive the market higher in 2025 has, in our view, been the resumption of interest-rate cuts from the Federal Reserve. However, following two consecutive rate cuts in September and October, there appears to be considerable uncertainty over the Fed's next move in early December*. 

 In part, this ambiguity reflects a hangover from the recent record-breaking government shutdown that disrupted the collection and release of economic data. The September payrolls report finally dropped last week, but this raised more questions than answers. 

 On the plus side, hiring was better-than-expected through September, with payrolls up 119,000, helped by improvements across a broader range of sectors***. However, there were familiar downward revisions to past hiring data, and the unemployment rate continues to drift concerningly higher***

This is the last official labor-market data the central bank will get before it decides interest rates December 10. The October and November reports will be delayed until December 16, with only part of the October edition published due to missed data collection***. 

Similarly, the Fed will not get an October CPI report, with the November reading also due after its December gathering*. For a central bank targeting inflation and employment, we think this shortfall is far from ideal. 

 The minutes from the October meeting appear to show clear concerns at the Fed around these disruptions - "various participants expressed concern about‚ the ability to accurately assess economic conditions because of limitations to the availability of federal government data"****. 

 Additionally, following two consecutive rate cuts*, and with inflation at 3%*, well above the Fed's 2% target, the more hawkish members of the committee seem to be becoming uneasy with further policy easing - "Most participants noted that, against a backdrop of elevated inflation readings and a very gradual cooling of labor market conditions, further policy rate reductions could add to the risk of higher inflation becoming entrenched"****. 

 Against this backdrop, market expectations for a cut in December have been on a wild ride*. In late October a cut was seen as a done deal, with pricing in money markets putting close to a 100% chance of a 25 basis point (0.25%) move*. These odds slid to a low of 30% early last week, before bouncing to 70% on Friday amid some dovish commentary from New York Fed President Williams*. 

 We think the decision will be finely balanced, with numerous dissents likely in the case of a cut or a hold. Further forward, we remain confident that the path for the fed funds rate is lower as the Fed reverses the post-pandemic tightening in monetary policy, which should help support U.S. growth and corporate earnings, particularly in the interest-rate-sensitive small-cap sector. However, against the backdrop of solid growth, and potentially persistent inflation, we think market expectations for rates to bottom around 3% next year* might be a little optimistic, and instead we see the fed funds rate falling to between 3% - 3.5% instead. 

 We think this gap between our expectations and market pricing could pose a risk to small-cap equities. However, if the Fed is cutting by less because of a solid, or even improving economic backdrop, these dynamics might compensate for the higher interest-rate costs in the sector, in our view. 

Diversification can soften shocks An outbreak of volatility following a period of calm can feel unsettling. Movie directors use these sudden shifts to keep viewers on the edge of their seats. 

However, we shouldn't be shocked into taking drastic changes to portfolios following the recent market reassessment. Instead, we think these dynamics can provide some useful reminders in the value of diversification. 

 The AI-led sell-off over recent weeks has sparked some rotation in the market toward unloved sectors, like health care and materials/energy*. We believe these companies could offer further potential for catch-up growth should we see further AI selling, especially given their lower valuation. 

More broadly, we think exposure to U.S. mid-cap stocks, international small and mid-cap developed market equities and emerging-market equities can provide additional diversification, especially given our view of an improving economic outlook overseas and more attractive multiples*. Importantly, we think these opportunities look attractive alongside a continued exposure to the AI theme via large-cap U.S. stocks. 

Finally, should we spring into action in the face of this shock? Speak to your financial advisor about potentially taking advantage of this market dip, if appropriate. With inflation running around 3%, the real return on cash-like investments is now running at less than 1%*. Based on your time horizon and risk tolerance, we think the latest pullback could offer some more return potential from strategic allocations in equities and bonds, especially if the three-year bull market continues into 2026 as we expect. 

 Looking Ahead

 Important economic data for the week ahead include housing and consumer confidence data. Government data that were impacted by the government shutdown are expected to gradually resume over the coming weeks, now that the shutdown has ended. 

THE UNKNOWN / IT’S ABOUT TIME. BUT WHAT IS TIME?

Time isn't an illusion, unlike optical illusions that trick your eyes. There's nothing to 'trick' because it has no physical basis. So what is it? Rather than something that 'flows,' a philosopher suggests time is a psychological projection. 

GUEST BLOG / By Adrian Bardon Professor of Philosophy, Wake Forest University, via TheConversation.com

"Time flies," "time waits for no one," "as time goes on": The way we speak about time tends to strongly imply that the passage of time is some sort of real process that happens out there in the world. 

 We inhabit the present moment and move through time, even as events come and go, fading into the past. But go ahead and try to actually verbalize just what is meant by the flow or passage of time. A flow of what? Rivers flow because water is in motion. What does it mean to say that time flows? 

 Events are more like happenings than things, yet we talk as though they have ever-changing locations in the future, present or past. But if some events are future, and moving toward you, and some past, moving away, then where are they? The future and past don't seem to have any physical location. 

 Human beings have been thinking about time for as long as we have records of humans thinking about anything at all. The concept of time inescapably permeates every single thought you have about yourself and the world around you. 

 That's why, as a philosopher, philosophical and scientific developments in our understanding of time have always seemed especially important to me. 

 Ancient philosophers on time 

 Parmenides of Elea [6th to 5th centuries BCE] was an early Greek philosopher who thought about the passage of time. He like other ancient philosophers were very suspicious about the whole idea of time and change. Parmenides wondered, if the future is not yet and the past is not anymore, how could events pass from future to present to past? He reasoned that, if the future is real, then it is real now; and, if what is real now is only what is present, the future is not real. So, if the future is not real, then the occurrence of any present event is a case of something inexplicably coming from nothing. 

 Parmenides wasn't the only skeptic about time. Similar reasoning regarding contradictions inherent in the way we talk about time appears in Aristotle, in the ancient Hindu school known as the Advaita Vedanta and in the work of Augustine of Hippo, also known as St. Augustine, just to name a few. 

 Einstein and relativity 

 The early modern physicist Isaac Newton had presumed an unperceived yet real flow of time. To Newton, time is a dynamic physical phenomenon that exists in the background, a regular, ticking universe-clock in terms of which one can objectively describe all motions and accelerations. 

 Then, Albert Einstein came along. 

 In 1905 and 1915, Einstein proposed his special and general theories of relativity, respectively. These theories validated all those long-running suspicions about the very concept of time and change. 

 Relativity rejects Newton's notion about time as a universal physical phenomenon. 

By Einstein's era, researchers had shown that the speed of light is a constant, regardless of the velocity of the source. 

 To take this fact seriously, he argued, is to take all object velocities to be relative. Nothing is ever really at rest or really in motion; it all depends on your "frame of reference." A frame of reference determines the spatial and temporal coordinates a given observer will assign to objects and events, on the assumption that he or she is at rest relative to everything else. 

 Someone floating in space sees a spaceship going by to the right. But the universe itself is completely neutral on whether the observer is at rest and the ship is moving to the right, or if the ship is at rest with the observer moving to the left. 

 This notion affects our understanding of what clocks actually do. Because the speed of light is a constant, two observers moving relative to each other will assign different times to different events. 

 In a famous example, two equidistant lightning strikes occur simultaneously for an observer at a train station who can see both at once. An observer on the train, moving toward one lightning strike and away from the other, will assign different times to the strikes. This is because one observer is moving away from the light coming from one strike and toward the light coming from the other. 

The other observer is stationary relative to the lightning strikes, so the respective light from each reaches him at the same time. Neither is right or wrong. 

 In a famous example of relativity, observers assign different times to two lightning strikes happening simultaneously. How much time elapses between events, and what time something happens, depends on the observer's frame of reference. 

 Observers moving relative to each other will, at any given moment, disagree on what events are happening now; events that are happening now according to one observer's reckoning at any given moment will lie in the future for another observer, and so on. 

Under relativity, all times are equally real. Everything that has ever happened or ever will happen is happening now for a hypothetical observer. There are no events that are either merely potential or a mere memory. 

There is no single, absolute, universal present, and thus there is no flow of time as events supposedly "become" present. Change just means that the situation is different at different times. At any moment, I remember certain things. At later moments, I remember more. That's all there is to the passage of time. This doctrine, widely accepted today among both physicists and philosophers, is known as "eternalism". 

This brings us to a pivotal question: If there is no such thing as the passage of time, why does everyone seem to think that there is? Time as a psychological projection 

One common option has been to suggest that the passage of time is an "illusion" - exactly as Einstein famously described it at one point. Calling the passage of time "illusory" misleadingly suggests that our belief in the passage of time is a result of misperception, as though it were some sort of optical illusion. 

But I think it's more accurate to think of this belief as resulting from misconception. As I propose in my book "A Brief History of the Philosophy of Time," our sense of the passage of time is an example of psychological projection - a type of cognitive error that involves misconceiving the nature of your own experience. 

The classic example is color. A red rose is not really red, per se. Rather, the rose reflects light at a certain wavelength, and a visual experience of this wavelength may give rise to a feeling of redness. 

My point is that the rose is neither really red nor does it convey the illusion of redness. The red visual experience is just a matter of how we process objectively true facts about the rose.

 It's not a mistake to identify a rose by its redness; the rose enthusiast isn't making a deep claim about the nature of color itself. Similarly, my research suggests that the passage of time is neither real nor an illusion: It's a projection based on how people make sense of the world. I can't really describe the world without the passage of time any more than I can describe my visual experience of the world without referencing the color of objects. 

I can say that my GPS "thinks" I took a wrong turn without really committing myself to my GPS being a conscious, thinking being. My GPS has no mind, and thus no mental map of the world, yet I am not wrong in understanding its output as a valid representation of my location and my destination. 

Similarly, even though physics leaves no room for the dynamic passage of time, time is effectively dynamic to me as far as my experience of the world is concerned. 

The passage of time is inextricably bound up with how humans represent our own experiences. Our picture of the world is inseparable from the conditions under which we, as perceivers and thinkers, experience and understand the world. Any description of reality we come up with will unavoidably be infused with our perspective. The error lies in confusing our perspective on reality with reality itself.