ANGLES, from Anglia Advisors
ANGLES.
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Time Out.

09/03/2023. Catch up with all you need to know from the entire previous week in financial markets in less than ten minutes every Sunday by reading or listening to my weekly market review.

A reasonably solid last few days of the month wasn’t enough to rescue August from being the first losing month for stocks since February, with the Large Cap S&P 500, the tech-heavy NASDAQ-100 and the Small Cap Russell 2000 losing 1.8%, 2.2% and 4.5% respectively.

We're now heading into what is often the rockiest part of the year. September is the only month to have historically seen more stock market declines than advances over the years and October has previously hosted some of the most spectacular bouts of volatility.

This particular September/October period carries its own additional risk with the quietly-growing possibility of a shutdown of the US government on September 30th as the “burn it all down” rabble in Congress seems once again determined to wreak havoc with any proposed government funding measures.

It was a data-packed week with a lot for analysts, investors and assorted nerds like me to pore over.

Q2 Gross Domestic Product (GDP, see EXPLAINER: FINANCIAL TERM OF THE WEEK below) increased at a 2.1% annualized rate last quarter according to the second of three estimates of US GDP for the April-June period. That was a revision down from the 2.4% pace reported in the initial estimate, but still a fraction higher than the final number from Q1. Meanwhile, the Atlanta Fed's GDPNow model (see GROWTH ESTIMATE FOR THE CURRENT QUARTER GDP below) is still spitting out a monster 5.6% GDP growth rate estimate for the current Q3. That's based on the July and August data that has come in so far.

The latest Job Openings and Labor Turnover Survey (JOLTS) showed that US job openings fell by more than expected to just over 8.8 million - the lowest level since 2021. This offered fresh evidence that labor demand is finally slowing down meaningfully. The quit rate fell back to its pre-pandemic level of 2.3%, so that whole Great Resignation thing is now over.

The Fed’s fave, the Core Personal Consumption Expenditures (PCE) index of inflation held steady last month. Separate data showed that consumer confidence has dropped amid souring views on jobs and higher borrowing costs.

And then we had the Big Daddy of economic data on Friday morning, the Jobs Report for August showed payrolls up by 187k, a bit above estimates of 170k but the previous two monthly increases were revised lower. However, unemployment surprisingly jumped from 3.5% to 3.8%, the highest since February 2022 and average hourly earnings have increased by 4.3% from a year ago, a touch below expectations. This was considered to be all very Goldilocks.

The conclusion drawn from all this is that the economy is undergoing a controlled cooling which was seen to further reduce (maybe even entirely snuff out) any lingering risk that the Fed will raise interest rates again at its September 19th/20th meeting with Fed Chair Jerome Powell widely expected to call a time out on the rate hike process.

Yet again, we saw a number of examples last week of a relatively orderly deterioration in economic conditions sending stocks ripping higher. However we need to remember that ongoing bad economic data is not good for markets in the medium and longer term, as stocks much prefer resilient growth and higher (but stable) market interest rates rather than collapsing growth and plummeting yields.

So far, recent declines in stocks and the uptick in volatility have been more a function of previously unrealistically optimistic expectations and not some sudden, materially negative shift in fundamentals, as that simply hasn’t happened yet. But stocks have aggressively priced in essentially no damage to the Three Pillars of the Rally (1. No Landing / Soft Landing, 2. Disinflation, 3. Fed Done/Almost Done with Rate Hikes).

If we get a pile-on of negative news, namely disappointing growth data that raises significant hard landing worries, a rebound in inflation or Powell hinting that rates will rise further, then the Three Pillars will begin to erode and things could get ugly quite quickly with a give-back of much or even all of the entire year’s gains not out of the question.

Based on facts as they are now, there is no reason to think that a hard landing is any more likely now than it was months ago, nor that inflation is about to reverse its recent decline - but I will be keeping a cautious eye on things as the consequences of such developments would be significantly damaging to stock prices.

OTHER NEWS ..

NFTs’ Life Support Could Soon Be Switched Off .. Remember all the ridiculous ballyhoo back in 2021? Non-Fungible Tokens (NFTs) were the can’t-miss next thing, the future of art and culture. People were quitting their jobs, cleaning out their savings and retirement funds and stealing from their parents just so they could buy pictures of basketball players or penguins for insane sums of money ranging into the millions of dollars. Celebs were lining up around the block to promote such nonsense. If you didn’t own at least one, you were an idiot loser - too blind and stupid to see the glorious future of NFTs.

Well, that brave new world has now pretty much crumbled to dust. Billionaires Steve Cohen and Mark Cuban have both thrown in the towel and are shutting down the NFT marketplaces they backed, Recur and Nifty respectively, due to “unforeseen challenges” , “investment opportunities that didn’t pan out.” and other such gibberish corporate-speak excuses for having got swept up in a mania and ploughed huge sums of money into something that was always going to fail. Another leading NFT marketplace, Blur, has seen its sales volume drop by 96% and is apparently considering corporate hara-kiri as well.

The final nail in the NFT coffin could well be hammered home soon with a potential regulatory crackdown. On Monday, the US Securities and Exchange Commission (SEC) took its first enforcement action on NFTs, alleging that they are really unregistered securities and whatever piddly trading volume remains is actually illegal anyhow.

Bitcoin ETF? .. Grayscale Investments took one step forward toward launching a spot-based bitcoin (BTC) exchange traded fund (ETF) in the U.S., after judges overturned a previous ruling on Tuesday. Such an ETF would be tied to the spot bitcoin price and could potentially draw billions of dollars from everyday investors. The ruling to overturn the SEC's initial block sent bitcoin's price higher. The wait goes on, but we may be closer.

Credit Cards Might Just Become Even More Expensive To Use .. Visa (V) and Mastercard (MA) aim to generate an additional $502 million by increasing merchant fees over the coming months – with a sizable portion applied to online purchases. The extra revenue will largely come from network fees and swipe fees for transactions. Fee increases have drawn attention to the ongoing tension between credit-card networks and merchants of all sizes, who often pass additional expenses on to card-users.

UNDER THE HOOD ..

The S&P 500 index SPX closed on Friday at 4516, up nicely for the week. The next upside resistance points are to be found at 4541, 4577 and 4607. Downside support levels are at 4488, 4465 and 4450.

A little over half the stocks in the S&P 500 are above their 200-day moving averages and a little under half are below. Normally, you would consider that to be a neutral reading, but the capitalization-weighted S&P 500 (the larger the company, the higher its weight in the index) is up 19% so far this year, while the equal-weighted S&P 500 index (all 500 stocks are weighted equally at 0.2% of the index each) is only up 7%, which is a clear indication of how essential the big names (mostly the so-called “Magnificent Seven”; Apple, Microsoft, Alphabet/Google, Meta/Facebook, Amazon, Nvidia and Tesla) have been to this whole 2023 rally and how the index could fall quite sharply and quite quickly if those big names start to roll over.

Given how much they have advanced this year on the back of what is pretty much universally agreed to be overly positive sentiment, this scenario is entirely plausible, but unless or until we see this start to happen, stocks are still considered to be in a technically positive overall trend.

Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.


THIS WEEK’S UPCOMING CALENDAR ..

U.S. stock and bond markets will be closed on Monday for Labor Day. Investors will return from the long weekend to a very light week of data releases after last week’s deluge.

A few companies like Kroger, Intuit and Danaher are still left to report but most analysts’ attention will be focused on the Institute for Supply Management's August Services Purchasing Managers’ Index for a snapshot of how the service sector of the economy is doing. The Fed really cares about this reading. Put very simply, it’s a 0-100 index and if it’s above 50 then it’s good news for the economy and if it’s below 50 it’s not.


LAST WEEK BY THE NUMBERS ..

Last week’s market color courtesy of finviz.com

Last week’s best performing US sector: Technology (two biggest holdings: Apple, Microsoft) - up 3.6% for the week.

Last week’s worst performing US sector: Utilities (two biggest holdings: NextEra Energy, Southern Co.) - down 1.5% for the week.

The proprietary Lowry's measure for US stock market Buying Power rose by 3 points last week to 149 and that of US stock market Selling Pressure fell by 10 points to 128 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 now above its 50-day and 90-day moving averages and above its long term trend line, with a RSI of 59***. SPY ended the week 5.6% 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 now above its 50-day and 90-day moving averages and above its long term trend line, with a RSI of 59***. IWM ended the week 21.3% 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 3.6 points lower at 13.1. It is now back below its 50-day and 90 day moving averages and below its long term trend line.


AVERAGE 30-YEAR FIXED RATE MORTGAGE ..

  • 7.18%

(one week ago: 7.23%, one month ago: 6.90%, one year ago: 5.66%)

Data courtesy of: FRED Economic Data, St. Louis Fed as of Thursday of last week.

GROWTH ESTIMATE FOR THE CURRENT QUARTER GDP ..

Q3: +5.6%

(Previous quarters .. Q2: +2.1% provisional .. Q1: +2.0% final)

This data comes from the Atlanta Fed which periodically issues its 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.

AAII US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..

  • ↑Bullish: 33% (32% a week ago)

  • ⬌ Neutral: 32% (32% a week ago)

  • ↓Bearish: 35% (36% a week ago)

Net Bull-Bear spread: ↓Bearish by 2 (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: interest rate changes on September 20th after its next meeting?

  • ⬌ No change .. 94% probability

    (one week ago: 81%, one month ago: 82%)

  • ↑ 0.25% increase .. 6% probability

    (one week ago: 19%, one month ago: 18%)

Where will interest rates be at the end of 2023?

  • ↓ Lower than now .. 5% probability

    (one week ago: 3%, one month ago: 9%)

  • ⬌ Unchanged from now .. 62% probability

    (one week ago: 43%, one month ago: 62%)

  • ↑ Higher than now .. 33% probability

    (one week ago: 54%, one month ago: 29%)

Based on the Fed Funds rate (currently 5.375%)
Data courtesy of CME FedWatch Tool. 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 (5.58%) being paid currently for the 4-month duration and the lowest rate (4.18%) 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 from 0.78% to 0.69%, indicating a 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.

ARTICLE OF THE WEEK ..

For many investors, their actual investment returns can be 20% lower than the returns of what they are invested in. Huh??


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).

GROSS DOMESTIC PRODUCT

  • Gross domestic product is the monetary value of all finished goods and services made within a country during a specific period.

  • GDP provides an economic snapshot of a country, used to estimate the size of an economy and its growth rate.

  • GDP can be calculated in three ways, using expenditures, production, or incomes and it can be adjusted for inflation and population to provide deeper insights.

  • Real GDP takes into account the effects of inflation while nominal GDP does not.

  • Though it has limitations, GDP is a key tool to guide policymakers, investors, and businesses in strategic decision-making.

The calculation of a country’s GDP encompasses all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs, and the foreign balance of trade. Exports are added to the value and imports are subtracted.

Of all the components that make up a country’s GDP, the foreign balance of trade is especially important. The GDP of a country tends to increase when the total value of goods and services that domestic producers sell to foreign countries exceeds the total value of foreign goods and services that domestic consumers buy. When this situation occurs, a country is said to have a trade surplus.

If the opposite situation occurs—that is, if the amount that domestic consumers spend on foreign products is greater than the total sum of what domestic producers are able to sell to foreign consumers—it is called a trade deficit. In this situation, the GDP of a country tends to decrease.

GDP can be computed on a nominal basis or a real basis, the latter accounting for inflation. Overall, real GDP is a better method for expressing long-term national economic performance since it uses constant dollars.

Let's say one country had a nominal GDP of $100 billion in 2012. By 2022, its nominal GDP grew to $150 billion. Prices also rose by 100% over the same period. In this example, if you looked solely at its nominal GDP, the country's economy appears to be performing well. However, the real GDP (expressed in 2012 dollars) would only be $75 billion, revealing that an overall decline in real economic performance actually occurred during this time.

Nominal GDP is an assessment of economic production in an economy that includes current prices in its calculation. In other words, it doesn’t strip out inflation or the pace of rising prices, which can inflate the growth figure.

All goods and services counted in nominal GDP are valued at the prices that those goods and services are actually sold for in that year. Nominal GDP is evaluated in either the local currency or U.S. dollars at currency market exchange rates to compare countries’ GDPs in purely financial terms.

Nominal GDP is used when comparing different quarters of output within the same year. When comparing the GDP of two or more years, real GDP is used. This is because, in effect, the removal of the influence of inflation allows the comparison of the different years to focus solely on volume.

Real GDP is an inflation-adjusted measure that reflects the number of goods and services produced by an economy in a given year, with prices held constant from year to year to separate out the impact of inflation or deflation from the trend in output over time. Since GDP is based on the monetary value of goods and services, it is subject to inflation.

Rising prices tend to increase a country’s GDP, but this does not necessarily reflect any change in the quantity or quality of goods and services produced. Thus, by looking just at an economy’s nominal GDP, it can be difficult to tell whether the figure has risen because of a real expansion in production or simply because prices rose.


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