Investment Insights

 — Steve Orr 

High end

Talk about going out with a bang. In the final 15 minutes of trading on Friday, somebody or group caused quite a surge. During that brief span, the NASDAQ jumped 0.5% and the S&P 500 rose 0.3%. Some of the buying was from risk parity portfolios; bonds performed better than stocks in the month. Bonds were sold to buy stocks. Others, we guess needed some good marks in their portfolio. We wondered if that surge would hold. At least the Dow Industrials hit a new high. We are encouraged by the Dow and S&P 500 Equal Weight indices. Both are gaining ground at the expense of the tech-heavy NASDAQ. The broadening of positive price action to Health Care, Utilities and Financial sectors is a welcome strengthening of the underlying trend.

Easy financial conditions and the availability of funding in the markets has suppressed daily volatility. So, a “normal” August with a 6% drop and 8% rebound seems like a crazy volatile month. Warning: Those of us who walked to school uphill both ways remind you that was a reasonable month in history. September is here, and its time to cinch your seat belts. September ranks last in monthly performance, averaging a 1% loss for the month over the last 70 years.

Do take note of the current Bull cycle, however; Bespoke Research points out that the S&P 500’s 26% return over the last 12 months puts it in the 78th percentile of returns. Not bad at all. The broad investment grade bond market is up 6% over the same span. Not bad either, considering the hell of 2022 and most of 2023 for interest rates. 

Big ledge

And the results are in for the first day of September. Friday’s rally would not hold. On cue, the NASDAQ dropped 3.3%, S&P 500 just a -2.4%. The Dow Industrials fared the best, only dropping 1.5%. We mentioned in prior missives our concern that only the Dow Industrials broke to new highs in last month’s rebound. The other major indices have all run back toward their prior highs and failed around August 23.

A Bull pattern continuation would have the index power through to a new high, come back down around the old new high level, muck around a few days then build higher. A selloff to retrace the lows of early August would start just like today: 3 or 4 stocks down for every stock higher. The percentage of stocks above their 10-day moving average would slip to around 40% from today’s 53%. The intermediate Bull trend remains intact as 73% of S&P 500 members are above their 200-day moving average. We would reassess our indicators if the selloff pulled that percentage below 60%. 

Snow job

Last week we described the BLS annual job estimate revision and how it may affect the Fed’s thinking. The green eyeshade folks at the BLS think that by the time they are through with their annual estimate updates next February that monthly jobs from March 2023 through March 2024 may be around 68,000 less per month.

Whatever the final number is, it will be a meaningful reduction in growth over that period. We are confident that economic activity has slowed since March and further reductions may be necessary. These revisions combined with the upward creep in the Unemployment rate are likely the main drivers for the Fed’s newfound employment focus. We know history rhymes, thanks to Mark Twain. In the post gold-standard era (“ex Bretton Woods, in econ lingo), the unemployment rate has sprung higher at the same time total payrolls began to fall. Today we can stipulate that the unemployment rate has bottomed but not yet sprung. Total payrolls (green line) may be running out of steam (second derivative alert) but have not yet rolled over.

Source: Bloomberg, LP

This Friday’s August jobs report should show continued modest growth of 165,000 net new jobs and the unemployment rate improving to 4.1%. Both are consistent with a second gear economy that is coming off of a multi-year sugar high of federal deficit spending. The Most Anticipated Recession Ever is still months away at the soonest. 

Two weeks!

We are a bit leery of cutting rates at this point. The Fed has a deserved reputation for cutting and raising rates too late in an economic cycle. Perhaps weaker data in the coming months will prove to us that the recession has already begun. Certainly, the comments by Dollar General’s CEO in its earnings call last week get our attention. “More of our customers report that they are now resorting to using credit cards for basic household needs and ~30% have at least 1 credit card that has reached its limit.” Ouch. The effects of the Fed’s rate increases from 0% to 5% are still being felt. Housing has been in recession for two years; manufacturing at least a year, if not 18 months. A rate cut in two weeks is immediate in market psychology impact, three months in housing and a year in the rest of the economy. For many pockets of the economy, relief will have to wait.