A Fine Start — Week of September 7, 2021

As of market close September 3, 2021. Returns in percent.

A Fine Start

A dismal jobs report did little to dent stock markets' fine start for September. Gains of a third to one and a half percent across the averages made for a happy holiday. Checking over our shoulder, August marked the seventh straight month of positive returns for the S&P 500. Along the way investors have been treated to muted swings, with no correction greater than 5%. 

Through the summer, much of the positive action in stocks was confined to mega-caps and tech. Over the three mosquito months, the S&P tech sector nearly notched a 14% gain while energy fell almost the same amount. Tech held up well last week, but energy and consumer staples made up ground, thanks to delta slowing. All finished the week at least 1.3% higher. 

Mid Cap companies, as measured by the S&P 400 index, fell as much as 7% from May through mid-July, but last week finally made it back to May levels. Small caps traced the same path, briefly touching “correction” levels of down 10%, but now sit about 3% below their summer peak. We prefer rallies to be broad-based, pulling stocks from every sector and cap size higher. At this point in the rally, the S&P 500 is in overbought territory, meaning that the current index level sits more than one standard deviation above its 50-day moving average. Being overbought does not mean prices are going to turn suddenly and become oversold; in fact, markets can rally and stay overbought for long periods. The Dow indices remain in neutral territory, a function of their weighting towards industrial and value companies. Stocks liked Friday’s weaker jobs report, because slower growth means more Fed accommodation for longer. 

Jobs? What jobs?

Recall last week we were expecting a jobs number closer to 500,000. At least we were closer to the horseshoe stake than most. Non-farm payrolls rose 235,000 in August, far below the median estimate of 750,000. June and July numbers were artificially boosted by adjustments to the education sector. Factoring these adjustments out, private sector payrolls have averaged gains of 616,000 per month over the last three months. That is certainly better than the headline, and indicative of continued growth. Much of the blame for the low August headline number is directed at the delta variant. Missing work due to illness, childcare or other factors may account for some of the miss. We would posit continued unemployment supplements also play a factor. 

Average hourly earnings rose 0.6% for a year-over-year increase of 4.3%. This stands in contrast to the consumer price index gains above 5%. Despite stimulus efforts, prices are still rising faster than wages. Labor force participation is a key to recovery, and at 61.7, this metric remains flat year-over-year. The recovery needs to pull four to five million people from the pool of seven million individuals receiving unemployment supplements into the workforce to move this number back to its pre-pandemic level of 63.3%.

Ledger Review

This month ranks last in stock performance in most periods. Pre-war, post-financial crisis, you name it, September usually rides in the caboose. Over the last 20 years, 10 Septembers have posted negative results, averaging a loss of just over 1%. Through Friday, every major U.S. index has risen more than 15%, except the Dow Utilities. Cantor Fitzgerald reports that when markets have risen that much through August, September and October can hit some turbulence. Eight of the 14 cases produced negative September and Octobers. 

August’s results also caught our attention. The S&P 500 posted 11 new highs in the month. The two prior instances of rallies that strong were 1929’s 11 for the Dow and 1987’s 10. Both were followed by Congress pushing through business law changes in September and market reaction in October. We note that the budget reconciliation bills pending in Congress do have proposed corporate tax changes. 

The economy has headwinds of supply chain and labor inflation, imminent Fed tapering, and slower gains in corporate earnings. Supply chain issues here and abroad are not abating anytime soon. It seems that just when one port reopens, another goes into virus shutdown. The Fed is set to lower its monthly purchases starting next year, lessening the market’s perception of easy liquidity. Earnings estimates for this year and the next have made impressive jumps. As companies confront sustained higher costs for materials and labor shortages, margin increases will flatten or turn lower in the coming quarters.

On the positive side of the ledger, in the 14 cases mentioned above, only two years resulted in stocks finishing lower for the full year. FactSet data suggests the 12 continued rallies averaged a 5% gain. There is a great deal of chatter that yesterday’s ending of supplemental unemployment programs will send folks off their couches and back into the labor force. After the end of the four prior stimulus programs, retail sales have taken a noticeable dive. Boosting employment may offset softer retail sales. 

Corporations and many consumers are in their best financial shape in decades. Companies are flush with cash, and debt has either been paid down or refinanced at record low interest rates. Some student debt associated with for-profit schools that have closed has been forgiven. We expect the Administration to continue to find ways to lower the student debt burden. Some pent-up demand will accumulate over the next several months for new vehicles while chip manufacturing gets sorted out. Consumer and investor optimism has downshifted recently, likely due to the delta strain. Business leader outlooks remain strong for six- and 12-month horizons. 

Wrap Up

This is a light week for economic data. Earnings and economic growth rates have peaked but continue to trend higher at a slower pace. We expect economic expansion to continue, and GDP may still reach the 6% level this year. 

The shutdown recession and recovery have created a very compressed business cycle. As the recovery wave recedes, we would not be surprised to see weaker data over the next several months. In the short-term, minor up-and-down waves of start, stop and restart will continue to wash up on our economic beach. Big picture, bull trends remain in place, and we are fully invested for now.

Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary's University School of Law. Follow him on Twitter here. Greg Kalb is an Investment Advisor at Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts from The University of Texas at Austin.

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