The month of September duly lived up to its stock-killing reputation and there was a strong sense of good riddance from investors as markets closed on Friday. On the bright side, Octobers following losing Septembers have a history of being rather good for stock prices and November to December is historically a strong season.
Last week began with a predictable but mild snap-back rally on Monday after the carnage that had followed the outcome of the most recent Fed meeting the week before. But the relief was short-lived. By Tuesday, markets across the board were back in freefall after consumer confidence and expectation readings cratered and data showed new home sales plunging almost 9% in a month.
The mood was also not helped by announcements that Amazon is getting sued by the Federal Trade Commission (FTC) and by 17 states for so-called monopolistic practices and that Target is closing nine stores in four states, including one in Manhattan, due primarily to massive levels of organized retail theft (or “an increase in shrink” as corporate-speak calls it) and attacks on store staff.
The market took a breather on Wednesday and ended the day little changed - which was actually quite an impressive performance in the face of a big jump in oil prices that day to the highest level in over a year, a still-ripping US Dollar and the highest 10-year Treasury interest rates since Shaggy strongly protested that it wasn’t him in late 2000, dragging mortgage rates even higher (see AVERAGE 30-YEAR FIXED RATE MORTGAGE below).
And, of course, the sense then was that we had all moved one day closer to the world’s most pointless and unnecessary government shutdown caused by the “Burn It All Down” mob in Congress making a fool of the clueless and impotent Speaker Of The House. In the end, it seems that the can is simply being kicked down the road by a 45-day reprieve in last minute stop-gap measure which means we’ll likely go through all this utterly embarrassing shit again before Thanksgiving.
Investors came back in with some cautious dip-buying on Thursday, sensing perhaps that things had maybe fallen a bit too far a bit too fast and both surging oil prices and the rocketing US Dollar pulled back a bit. But the buying felt like it lacked any passionate enthusiasm as stock prices seemed to tick up only grudgingly.
Friday saw a resumption of the slide after a brief morning spike resulting from some hopeful inflation data (see below) ran out of steam and hopes of avoiding a government shutdown seemed to evaporate. Wall Street traders trudged home in a horrendous Manhattan rainstorm, which seemed to sum up another gloomy week that ended a pretty miserable month and a difficult quarter (watch out for my Quarterly Market Review in the next few days).
There is a slight whiff of stagflation in the air (the toxic simultaneous combo of high inflation and unemployment and slowing growth, see EXPLAINER: FINANCIAL TERM OF THE WEEK below) and that is a bad smell for stock markets. Any further data releases that point in that direction are not going to be well received by investors as they may pose an existential threat to the validity of the “Three Pillars” (1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes) upon which this year’s rally has been built. Indeed, these pillars are single-handedly the only rationale for stock prices being any higher in 2023 than they were in 2022 and if they begin to crumble then so could the entire stock market.
The final revision of Q2 Gross Domestic Product (GDP) showed last week that the rate of economic growth in the U.S. was unchanged from the second estimate, holding steady at an annualized rate of 2.1%. We also learned on Friday that the Fed’s favorite inflation measure, the Core Personal Consumption Expenditures (PCE) Price Index increased just 0.1% in August, lower than expected, indicating an annual core inflation rate of 3.9%, in line with expectations.
For a further meaningful decline to occur in stocks, we will have to see: 1) a clear slowing of growth and/or 2) a real rebound in inflation. To be clear, the data is not yet showing either of these right now and that’s a good thing.
Looking forward however, if the data does show either or even both problems occurring, do not be at all surprised by a swift 10-15% fall in stock prices (likely worse than that for tech names and YUC stocks) as the Three Pillars deteriorate. If the data shows that neither problem is happening, the S&P 500 could easily rally back a couple of hundred points higher from here. And, if the data remains mixed, contradictory or inconclusive, then expect conditions to continue to be choppy around current levels until such time as things break one way or the other.
So, what does a “Good” Outcome look like?
More “good” inflation reports, meaning that the Consumer Price Index (CPI) and Core PCE Price Index are flat or decline further
Goldilocks growth including no decline in retail sales and no spike in consumer credit
Mild and gradual softening of the labor market - monthly job creation in the mid-to-low 100k area, job openings back below 8m.
An end to expected Fed interest rate hikes and at least two rate cuts in 2024.
A solid Q3 earnings season, which begins on October 13th, particularly from the so-called Magnificent Seven, that’s Apple (AAPL), Alphabet (GOOGL), Nvidia (NVDA), Amazon (AMZN), Microsoft (MSFT), Meta Platforms (META) and Tesla (TSLA)
Any government shutdowns only last for a few days at most.
What does a “Bad” Outcome look like?
Inflation rebounds - CPI and Core PCE Price Index rise
We get a growth scare e.g., retail sales fall, consumer credit deteriorates
The labor market does not soften, meaning unemployment does not rise back up to around 4% and/or job openings remain stubbornly high.
Markets come to expect another interest rate hike (probability viewed as being over 50%) and either zero or only one rate cut in 2024.
Disappointing earnings for Q3 in general, but for the Magnificent Seven in particular
Any government shutdowns last for two weeks or more
OTHER NEWS ..
Less For More .. Buying a home or car right now is proving unaffordable for many American households because of the toxic mix of massively higher borrowing costs and much higher prices. Consumers in the market for loans to buy homes and cars are discovering that, because of the Federal Reserve’s relentless 18 month campaign of interest rate increases, their money gets them a lot less than it did a few years ago. Meanwhile, those with credit cards and other loans that carry rates pegged to broader interest benchmarks like the 2-year or 10-year Treasury rates are finding that their balances have gotten much more expensive to maintain.
A Wall Street Journal report estimates that the typical American household would now need to use 42 weeks of income to buy a new car, up from 33 weeks just three years ago. And, as reported in last week’s issue of Angles, the National Association of Realtors now calculates that the typical American family can no longer afford to buy a median-priced home.
Another One Bites The Dust .. The Wall Street Journal reported that Hong Kong’s criminal investigation into crypto platform JPEX has led to the arrest of at least 11 people last week with allegations that it defrauded investors of $192 million. Police swooped in just days after the securities regulator warned investors that JPEX lacked a regulatory permit and that users had been blocked from withdrawing their funds. and platform providers were ordered to block its website and app locally. Hong Kong’s response comes after it introduced a strict new regulatory regime for cryptocurrencies four months ago.
The WSJ report quoted Lily Fang, professor of finance and dean of research at INSEAD business school near Paris, as saying “This unfortunately shows that allowing retail trading in this space, which is known to be fraud-prone, when investor education is sorely lacking, is a mistake.”
Not A Good Look In China .. The billionaire chairman of the crisis-ridden massive property developer China Evergrande Group was taken away by Chinese police earlier this month and is now said to be under “residential surveillance.” The move against Hui Ka Yan is taking the saga at the world’s most indebted developer from just the financial realm into the criminal. Chinese authorities earlier this month detained some staff at the company’s wealth management unit and two former executives were also reportedly rounded up.
UNDER THE HOOD ..
The S&P 500 index SPX closed on Friday at 4288, down for the week. The next upside resistance points are to be found at 4300, 4350 and 4435. Downside support levels are at 4199, 4181 and 4088.
The remarkably low volume that has accompanied many of the market’s recent down-days is a beacon of hope for stocks from a technical standpoint. Moves on low volume tend to carry much less weight and persistence, implying less urgency and conviction among the sellers. These dips in price have tended to be the result of an absence of desire to buy rather than the presence of a desire to sell.
While the path of least resistance may have shifted lower for the S&P 500 in the near term with market interest rates at cycle highs, the long-term uptrend remains intact but it is one where Large Cap high quality stocks remain in better shape than the Small Cap segment.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
The latest Job Openings and Labor Turnover Survey (JOLTS), which comes out on Tuesday is expected to show about 8.8 million job openings in August, pretty much flat with a month earlier.
The Jobs Report for September on Friday is the main event. Expectations are for a 155k increase in payrolls, versus 187k in August. The unemployment rate is seen ticking down to 3.7% from 3.8%.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing US sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - flat for the week.
Last week’s worst performing US sector: Utilities (two biggest holdings: NextEra Energy, Southern Co.) - down 6.8% for the week.
The proprietary Lowry's measure for US stock market Buying Power fell by 4 points last week to 127 and that of US stock market Selling Pressure rose by 7 points to 146 over the course of the week.
SPY, the S&P 500 Large Cap ETF, is made up of the stocks of the 500 largest US companies. It is below its 50-day and 90-day moving averages but above its long term trend line, with a RSI of 34***. SPY ended the week 10.5% below its all-time high (01/03/2022).
IWM, the Russell 2000 Small Cap ETF, is made up of the bottom two-thirds in terms of company size of the group of the 3,000 largest US stocks. It is below its 50-day and 90-day moving averages and also below its long term trend line, with a RSI of 37***. IWM ended the week 27.1% below its all-time high (11/05/2021).
*** RSI (Relative Strength Index) above 70: technically overbought, RSI below 30: technically oversold
The VIX, the commonly-accepted measure of expected upcoming stock market risk and volatility (often referred to as the “fear index”) implied by S&P 500 index option trading, ended the week 0.3 points lower at 17.5. It is now above its 50-day and 90-day moving averages but still just below its long term trend line.
AVERAGE 30-YEAR FIXED RATE MORTGAGE ..
7.31%
One week ago: 7.19%, one month ago: 7.18%, one year ago: 6.70%
Data courtesy of: FRED Economic Data, St. Louis Fed as of Thursday of last week.
GROWTH ESTIMATE FOR THE CURRENT QUARTER GDP ..
Q3: +4.9%
Previous quarters .. Q2: +2.1% .. Q1: +2.0%
This data comes from the Atlanta Fed’s GDPNow model “now-cast”, which is a running algorithmic estimate of real seasonally-adjusted GDP growth for the current measured quarter based on multiple data points as they are released.
FEAR & GREED INDEX ..
“Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffet.
The Fear & Greed Index from CNN Business can be used as an attempt to gauge whether or not stocks are fairly priced and to determine the mood of the market. It is a compilation of seven different indicators that measure some aspect of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility and safe haven demand.
Extreme Fear readings can lead to potential opportunities as investors may have driven prices “too low” from a possibly excessive risk-off negative sentiment.
Extreme Greed readings can be associated with a sense of “FOMO” and investors chasing rallies in an excessively risk-on environment, possibly leaving the market vulnerable to a sharp downward correction at some point.
Data courtesy of CNN Business.
US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 28% (31% a week ago)
⬌ Neutral: 31% (34% a week ago)
↓Bearish: 41% (35% a week ago)
Net Bull-Bear spread: ↑Bearish by 13 (Bearish by 4 a week ago)
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Weekly sentiment survey participants are typically polled on Tuesdays and/or Wednesdays.
Data courtesy of: American Association of Individual Investors (AAII).
FEDWATCH INTEREST RATE PREDICTION TOOL ..
What will the Fed announce re: any interest rate change on November 1st after its next meeting?
⬌ No change .. 82% probability
One week ago: 74%, one month ago: 52%
↑ 0.25% increase .. 18% probability
One week ago: 26%, one month ago: 48%
Where will interest rates be at the end of 2023?
⬌ Unchanged from now .. 65% probability
One week ago: 55%, one month ago: 52%
↑ Higher than now .. 35% probability
One week ago: 45%, one month ago: 44%
Data courtesy of CME FedWatch Tool. Based on the Fed Funds rate (currently 5.375%). Calculated from Federal Funds futures prices as of Friday.
US TREASURY INTEREST RATE YIELD CURVE ..
The interest rate yield curve remains “inverted” (i.e. shorter term interest rates are generally higher than longer term ones) with the highest rate (5.61%) being paid currently for the 4-month duration and the lowest rate (4.59%) for the 10-year.
The closely-watched and most commonly-used comparative measure of the spread between the 2-year and the 10-year fell hard from 0.66% to 0.44%, indicating a significant flattening in the inversion of the curve during the last week.
Historically, an inverted yield curve has been regarded as a leading indicator of an impending recession, with shorter term risk deemed to be unusually higher than longer term. The steeper the inversion, the greater the deemed risk of recession.
The curve has been inverted since July 2022 based on the 2 year vs. 10 year spread.
Data courtesy of ustreasuryyieldcurve.com as of Friday. Light shaded area shows the current Federal Funds rate range.
ARTICLE OF THE WEEK ..
Time to crack out the popcorn. The long-awaited Sam Bankman-Fried crypto fraud trial finally kicks off this week. Here are the team lineups and a big game preview.
To brush up on your SBF knowledge, I recommend listening to this excellent podcast.
EXPLAINER: FINANCIAL TERM OF THE WEEK ..
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity).
Stagflation is the simultaneous appearance in an economy of slow growth, high unemployment, and rising prices.
Once thought by economists to be impossible, stagflation has occurred repeatedly in the developed world since the 1970s.
Policy solutions for slow growth tend to worsen inflation, and vice versa. That makes stagflation hard to fight.
Stagflation is an economic cycle characterized by slow growth and a high unemployment rate accompanied by inflation. Economic policymakers find this combination particularly difficult to handle, as attempting to correct one of the factors can exacerbate another.
Once thought by economists to be impossible, stagflation has occurred repeatedly in the developed world since the 1970s oil crisis.
In mid-2022, many were saying that the United States had not entered a period of stagflation, but might soon experience one, at least for a short period. In June 2022, Forbes magazine argued that a period of stagflation was likely because economic policymakers would tackle unemployment first, leaving inflation to be dealt with later.
The term stagflation was first used by British politician Iain Macleod in a speech before the House of Commons in 1965, a time of economic stress in the United Kingdom. He called the combined effects of inflation and stagnation a "'stagflation situation."
The term was revived in the U.S. during the 1970s oil crisis, which caused a recession that included five consecutive quarters of negative GDP growth. Inflation doubled in 1973 and hit double digits in 1974. Unemployment reached 9% by May 1975.
The effects of stagflation were illustrated by means of a misery index. This index, a simple sum of the inflation rate and the unemployment rate, tracked the real-world effects of stagflation on a nation's people.
Stagflation was once believed to be impossible. The advent of stagflation across the developed world later in the 20th century showed that this was not the case. Stagflation is a great example of how real-world experience can run roughshod over widely accepted economic theories and policy prescriptions.
Since that time, inflation has proved to be persistent even during periods of slow or negative economic growth. In the past 50 years, almost all declared recessions in the U.S. have seen a continuous, year-over-year rise in consumer price levels.
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