The final full week of September is historically on average the worst-performing week of the year for U.S. stocks. This time round, a very limited amount of consequential economic data ahead of the latest inflation reading on Friday and only a handful of earnings reports left the market feeling untethered and drifting, at the mercy of some notoriously unpredictable moving targets such as trader sentiment, global geopolitics, an erratic U.S. election campaign that feels like it could go off the rails at any moment, a looming government shutdown and lots and lots of Fed-Speak, with at least eight central bank officials, including chairman Jerome Powell on Thursday, scheduled to make speeches or participate in conferences during the week.
The Chinese central bank made a surprising cut in one of its key interest rates over the weekend as part of a massive package of moves to give an adrenaline shot to a rapidly cooling economy. There was more appalling carnage in the Middle East.
U.S. stocks, however, began the week by floating gently higher in a rather humdrum session on Monday on the back of the still high market-driven probability of yet another half point interest rate cut in November resulting from some very pro-rate cut Fed-speak from rate-setting committee members, Austan Goolsbee and Raphael Bostic. The S&P 500 index notched its 40th all-time record high close of the year.
It was more of the same on Tuesday. Tech stocks led markets higher, partly on the back of all the Chinese stimulus news, to all-time record high #41 of 2024 for the S&P 500. This was despite some evidence of declining consumer confidence and Fed-Speak from Governor Michelle Bowman, the only policymaker to dissent on the recent 0.50% cut, who said that the central bank should lower interest rates “at a measured pace” . Sounds like Michelle is still unconvinced by this whole jumbo half point cut malarkey.
Some air was let out of the balloon on Wednesday as the dearth of any significant data or earnings-based catalysts continued and investors maybe got a little bout of vertigo at the elevated stock price levels achieved over the last few weeks and decided to back off a bit for a while. In the background, the growing prospect of an Israeli ground invasion in Lebanon started raising serious geopolitical concerns. The indexes all finished lower, erasing most of Monday and Tuesday’s record-breaking gains.
Stock prices were strongly buoyed on Thursday morning by a very healthy Q2 Gross Domestic Product (GDP) final estimate of 3.0% annualized, robust sales forecasts from Micron (the stock surged 20% in a matter of minutes), a better-than-expected pre-market weekly jobless claims number, a further super-charging of the Chinese stimulus package and the emergence of a possible Israel/Lebanon 21-day ceasefire proposal.
Although markets gave some back later in the session as Netanyahu appeared to torpedo ceasefire hopes, the plethora of good news prevailed and Jerome Powell offered an optimistic picture of the economy in a major speech. It was another up-day across the board for stocks and yet again an all-time record closing high for the S&P 500.
The most impactful piece of data of the week hit the newswires before the opening bell on Friday. The latest Personal Consumption Expenditure (PCE) Price Index, which the Fed uses to judge where it believes inflation to really be, came in as expected at 2.2% annualized, still very close to the central bank’s 2.0% target number and clearing the path for more large and/or frequent interest rate cuts by keeping the Goldilocks narrative intact.
After initially reacting very positively in response to this data, stocks settled back into a holding pattern and ended basically unchanged for the session but largely higher for the week.
We cannot get into the minds of Fed interest rate-setting committee members to know what they are thinking, but if I had to guess I’d say it’s something like .. “If inflation was caused by the pandemic, stimulus spending and now-resolved supply chain issues and all those are now gone and inflation is pretty much back at 2%, then why do we need to have interest rates so high?”
To use a simple analogy, it’s like we were in a car hurtling down a steep hill. The Fed had to ride the brakes to stop inflation and make sure the car didn’t get out of control. But now the economy is back on a flat road and the Fed still has a foot on the brakes. If they don’t let off, the car will eventually stop (= a recession).
This is where the market’s strong conviction in more jumbo half point interest rate cuts before the end of the year and into 2025 comes from (see FEDWATCH INTEREST RATE TOOL below), despite the Fed itself only projecting a total of a half point cut across the remaining couple of meetings of 2024.
Either financial markets will be disappointed or the Fed will be bullied by Wall Street into cutting rates more than it would instinctively like. We’ll find out soon enough and one big clue will be this week’s Jobs Report.
OTHER NEWS ..
Higher And Higher .. As of Friday and measured by the S&P 500 index, the U.S. stock market had moved higher in 36 weeks of the last 52, which puts it in the best 5% ever of one year periods since 1957 by this count. On average, the S&P 500 tends to go up in 30 weeks per year.
The takeaway: as long as the economy is growing, the U.S. is adding jobs, corporate earnings are powering higher, and inflation isn’t a five-alarm fire, stocks have the capability to shake off any number of seemingly unsettling headlines and continue to march higher.
Not So Simple .. Conventional wisdom says that Wall Street likes split government (no one party controlling all of the House, Senate and presidency) since the resulting potential for gridlock maintains the status quo and reduces the seismic shifts and uncertainty that Wall Street detests.
However it’s not quite that simple. A split government does indeed mean that large scale policy changes (such as widespread tariffs, significant welfare or immigration reform, etc.) become less likely, but it also increases ongoing government shutdown risk and possibility that the Trump tax cuts will all completely expire at the end of next year. This will have basically the same effect as the shock of a sudden massive tax hike and could be damaging to businesses and markets.
On the other hand, a sweep certainly increases the possibility of performative, ill-considered and damaging colossal policy changes but - depending who it is that sweeps - could allow an extension or at least more thought-out and controlled amendments to some of the expiring tax cuts, thereby avoiding the de facto tax shock that frightens financial markets.
Massive Fashion Emergency .. Seems AI can’t get everything right. Wednesday was a mediocre day for the market in general, but it was a truly atrocious session for one-time highflier Stitch Fix. The stock plunged almost 40% in minutes and its market value fell to just $277 million, having peaked at $10 billion in early 2021 - a fall of over 97%. The company went public in 2017, promising to make customers look snappy in clothing selected for them by an AI-assisted algorithm.
ARTICLE OF THE WEEK ..
The most common outcome from buying a stock is that you lose all your money. Also stocks broadly have very positive, long-term expected returns.
Huh? How can those two things both be true? Here’s how.
THIS WEEK’S UPCOMING CALENDAR ..
The September jobs data provides this week's highlights. The Job Openings and Labor Turnover Survey (JOLTS) comes out on Tuesday. It's expected to show a roughly unchanged number of unfilled positions at the end of August.
But the week's main event will be the Jobs Report on Friday. The consensus estimate is for an increase of 145k payrolls in September, slightly more than in August. The unemployment rate is expected to hold steady at 4.2%. Americans' average hourly earnings are forecast to be up 3.8% from a year earlier.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Basic Materials (two biggest holdings: Linde, Sherwin Williams) - up 3.0% for the week.
Last week’s worst performing U.S. sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - down 1.8% for the week.
SPY, the S&P 500 Large Cap ETF, tracks the S&P 500 index, made up of 500 stocks from among the largest U.S. companies. Its price rose 0.4% last week, is up 20.2% so far this year and ended the week 0.1% below its all-time record closing high (09/26/2024).
IWM, the Russell 2000 Small Cap ETF, tracks the Russell 2000 index, made up of the bottom two-thirds in terms of company size of a group made up from among 3,000 largest U.S. stocks. Its price fell 0.6% last week, is up 9.8% so far this year and ended the week 9.2% below its all-time record closing high (11/08/2021).
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.08%
One week ago: 6.09%, one month ago: 6.40%, one year ago: 7.31%
Data courtesy of: FRED Economic Data, St. Louis Fed as of last Thursday.
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 of the most important indicators that measure different aspects of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call option ratio, 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 possibly too-frothy prices and a sense of “FOMO” with investors chasing rallies in an excessively risk-on environment . This overcrowded positioning leaves the market potentially vulnerable to a sharp downward reversal at some point.
A “sweet spot” is considered to be in the lower-to-mid “Greed” zone.
Data courtesy of CNN Business as of Friday’s market close.
FEDWATCH INTEREST RATE TOOL ..
Where will interest rates be after the Fed’s next meeting on November 7th?
Higher than now .. 0% probability (0% a week ago)
Unchanged from now .. 0% probability (0% a week ago)
0.25% lower than now .. 46% probability (49% a week ago)
0.50% lower than now .. 54% probability (51% a week ago)
All data based on the Fed Funds interest rate (currently 4.875%). Calculated from Federal Funds futures prices as of the market close on Friday. Data courtesy of CME FedWatch Tool.
% OF S&P 500 STOCKS TRADING ABOVE THEIR 50-DAY MOVING AVERAGE:
83% (414 of the S&P 500 stocks ended last week above their 50D MA and 86 were below)
One week ago: 77%, one month ago: 77%, one year ago: 15%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE:
80% (400 of the S&P 500 stocks ended last week above their 200D MA and 100 were below)
One week ago: 75%, one month ago: 77%, one year ago: 27%
Closely-watched measures of market breadth and participation, providing a real-time look at how many of the S&P 500 index stocks are trending higher or lower, as defined by whether the stock price is above or below their more sensitive 50-day (short term) and less sensitive 200-day (long term) moving averages which are among the most widely-followed of all stock market technical indicators.
The higher the reading, the better the deemed health of the overall market trend, with 50% considered to be a key pivot point. Readings above 90% or below 15% are extremely rare.
WEEKLY US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 49% (51% a week ago)
⬌ Neutral: 27% (23% a week ago)
↓Bearish: 24% (26% a week ago)
Net Bull-Bear spread: ↑Bullish by 25 (Bullish by 25 a week ago)
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Survey participants are typically polled during the first half of the week.
Data courtesy of: American Association of Individual Investors (AAII).
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