Partisan rancor reached a fever pitch today over the Senate’s deliberations to confirm DC Judge Brett Kavanaugh to the Supreme Court. Wall Street’s response: Meh.

The traders in lower Manhattan have a tendency to dismiss political turmoil. Upbeat economic reports Friday drowned out the shrill bickering on Capitol Hill, pushing the Dow Jones Industrial Average and the tech-heavy Nasdaq into the green. The S&P 500 closed essentially flat.

Volatility spiked in the final 30 minutes of trading, as stocks started to lose traction. In the late afternoon, Republican Senators agreed to a one-week delay on a full floor vote on Kavanaugh to allow an FBI investigation. But among investors, the greater concerns today were the economy, trade war, and tech sector volatility.

Friday marked the final trading day of the third quarter. Major indices posted a week of losses although they’ve performed well for September and the quarter. In the next issue of Mind Over Markets, I’ll review the quarter.

The Commerce Department reported Friday that consumer spending rose 0.3% last month after an unrevised 0.4% gain in July. August’s slight increase in consumer spending met expectations but suggested the economy could be cooling.

The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation measure, excluding the volatile food and energy components, was unchanged. This so-called “core PCE” gauge remained at the Fed’s 2% target for a fourth consecutive month.

The Commerce Department also confirmed that gross domestic product (GDP) grew at a 4.2% annualized rate in the second quarter.

Robust GDP, resilient consumer spending and only moderate inflation have helped the U.S. stock market outperform other major asset classes so far this year (data as of market close September 27):

Source: Macrobond

But headline risk continues to generate volatility.

Facebook (NSDQ: FB) fell 2.59% today, after the company announced that a security lapse had allowed hackers to misappropriate 50 million user accounts. Facebook is investigating.

Hacking dangers haven’t gone away. Nor has the trade war.

According to Thomson Reuters data released today, global mergers and acquisitions dropped to $783 billion in the third quarter, a year-over-year decline of 35%, as the U.S.-China trade war throws into question the regulatory aspects of many deals.

China’s official Purchasing Managers’ Index survey is due Sunday and it’s expected to show a decline in activity due to the trade war.

Meanwhile, Italian state bonds and European banks sold-off today, after the new coalition government proposed a 2019 budget with a massive deficit. At 130% of GDP, Italy’s debt burden is the heaviest among the large European Union economies.

Bullish signal for cyclicals…

As expected, the Federal Reserve on Wednesday raised rates for the third time this year. The Fed reaffirmed the consensus forecast that another hike will come in December, with three additional hikes likely in 2019.

The federal funds rate heavily affects short-term fixed income investments, such as deposit accounts, money market funds, Treasury bills, short-term bonds, and short-term bond funds.

When the fed funds rate is rising, bank savings accounts and money market funds pay a higher yield over time. As Uncle Sam issues new Treasury bills and short-term bonds, they should pay higher yields, too. Under today’s risky conditions, don’t underestimate the growing appeal of these conservative investments.

Rising rates underscore the importance of portfolio rebalancing. Certain stock sectors benefit from rising rates, because Fed tightening indicates accelerating economic growth.

Cyclical industries such as financial institutions, energy providers and industrial companies tend to outperform in a rising rate environment. Sectors vulnerable to rising rates include utilities, real estate investment trusts (REITs), telecoms, and consumer staples.

Another reason to light up…

The Fed surprised no one this week, but the SEC sure as heck surprised Tesla (NSDQ: TSLA).

The SEC filed a lawsuit yesterday that accused Tesla founder and CEO Elon Musk of making “false and misleading” statements about a plan to take Tesla private.

The agency charged Musk under Rule 10b-5 of the Exchange Act, which the SEC uses to pursue insider traders and stock manipulators.

Here’s the bombshell: the SEC wants a judge to bar Musk from serving as an officer or director of a public company.

The SEC’s move stems from an August 7 tweet, in which Musk stated that he could take debt-ridden Tesla private at $420 per share, a substantial premium to its trading price at the time, and that funding for the transaction was secured. All that remained, he insisted, was a shareholder vote. Tesla stock jumped more than 6% that day. The SEC charges that Musk knew his assertions weren’t true.

Musk shot back at the SEC, calling the agency’s lawsuit an “unjustified action” that leaves him “deeply saddened and disappointed.”

Fact is, Tesla is an under-performing company held aloft by Musk’s cult status. If he were ousted as leader, Tesla stock would crater. TSLA shares fell 0.67% yesterday and plunged another 13.90% today. Year to date, Tesla shares are down 17.40%.

Small wonder Musk has a well-known penchant for weed.

Friday Market Wrap

• DJIA: 26,458.31 +18.38 (0.07%)
  
• S&P 500: 2,913.98 -0.02 (0.00%)
  
• Nasdaq: 8,046.35 +4.38 (0.05%)
  

Friday’s Big Gainers

• BlackBerry (NYSE: BB) +11.68%

Mobile communications provider tops profit estimates.

• Associated Capital Group (NYSE: AC) +10.81%

Wealth advisory firm reduces stake in under-performing peer.

• American Midstream Partners (NYSE: AMID) +10.43%

Oil and gas MLP receives buyout offer from rival.

Friday’s Big Decliners

• Altimmune (NSDQ: ALT) -49.89%

Analysts give thumbs down to biotech’s stock offering.

• Geron (NSDQ: GERN) -23.81%

Biotech ceases collaboration with major drug player.

• Progress Software (NSDQ: PRGS) -17.06%

Business software developer misses on revenue.

Letters to the Editor

“What’s your take on the recent drop in semiconductor stocks?” — Andy H.

A temporary glut of chips has fueled concerns that chipmakers will take a hit. However, technological innovation in a host of industries will continue to drive demand for chips into the foreseeable future. The semiconductor sector is poised to outperform.

Got any questions or suggestions? Send me an email: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.