August continues to be a trying month. I say this to sort of put a bow around the first negative month we have experienced so far this year. Before discussing September, it’s right to look back at August. Interesting as it may be, this August seems to have largely traded in-line with the historical tendencies since 1929, according to Andrew Adams of FundStrat research. The nice thing is that we got a lot of clarity, and reprieve last week. On Wednesday we got the earnings report that all seemed to be waiting for, from the most visible technology company of today. As expected, the earnings, revenues and forecasts were nothing short of stronger than expected, yet the stock sold off. This could be categorized as selling on the news as the price had run up into the earnings report. On Friday we heard the live comments of Jerome Powel, Fed Chairman, at the financial summit in Jackson Hole. True to his word, Powell continued to stress that the Fed will remain "data dependent." He also made it clear that the economic reports tend to lag what is going on in the economy and therefore he was not going to hurry to raise rates again as he wants to see the effect of the rate hikes thus far. The markets: both bonds and stocks (US markets) liked this, and the equity indices put in a positive week when all was said and done. Interest rates were quite interesting as the 10-year US Treasury came right up to the 4.35% level that it saw last October and reversed lower.
This intimated to the markets that quite possibly inflation may be stickier for longer but quite possibly the Fed may be done with their work of raising rates. This was stated publicly by Goldman Sachs analysts on Friday. They stated, "There was no new information in the way of guidance on the medium-term outlook, but our research team continues to expect that further policy tightening will be unnecessary, making the July hike the last one in this hiking cycle."
Now, don't take this to mean that the August digestion is over, and it is back to a continued advance. August still isn't over, and this week is considered the last holiday vacation week of summer. This tends to make trading volume rather light and, as a result, large market moves tend to be tempered by a lack of participants at work to do the heavy lifting. Also, this week has some important inflation data that could weigh on the directional moves of the market as well.
Earnings season is over, so last quarter's earnings are sort of baked in the cake at this point. In looking at esoteric models like cycles, exhaustion measures, De Mark counts and such, there still hasn't been an extreme reached. We believe it is best to stick with quality, not focus on niche opportunities that could be too focused, and be prepared for bouts of continued volatility if they should occur. In looking at a chart of the month of August for the S&P 500 it can be seen that yes, it has been a down month, but it seems to be making an attempt at bottoming, although there is still some overhead resistance to deal with. I want to be clear that this is really a quite myopic view in an overall investment cycle, but big moves tend to smaller beginnings. Below is the picture of this, compliments of Thomas Lee of Fundstrat:
Election Battle Beginning and Underway
Since last week was the first Republican debate for the 2024 election, I felt that it might be interesting to give some color on how the markets (S&P 500) have reacted historically and therefore might act this time around. I looked at the daily trading in the S&P 500 throughout all the Presidential election years going back to 1932. As can be seen below, typically, the stock market has a rough start to a Presidential election year, then stabilizes and rallies back heading into the event. I also took the liberty of overlaying the events of the last few decades (election years starting in 1980) to concentrate on some more recent color.
I also separated the action of what happens if a Republican or a Democrat emerges as victorious.
One difference that we do see is that stocks tend to do better after the election if a Republican wins than if a Democrat wins. I thought you might find it interesting as well to see what happened in the Clinton vs. Trump election of 2016 as compared to Biden vs. Trump in 2020. I don't feel that there is enough of a difference here to make a comment about which party is most kind to the markets of late, but I did find these market actions interesting.
In trying to find some similar comparisons, I also took a moment and overlaid the action of the markets post the "Dot-Com Bubble 2002-2003" and the "Great Financial Crisis 2009-2010" and our current markets since the decline started at the beginning of 2022. What I come away with is that the news, economic reports, and concerns will continue to exist even after the damage has occurred, but the equity markets tend to be a discounting mechanism that looks forward.
We are sort of in a Fed commentary vacuum until the next Fed meeting in September, so the economic indicators that we get this week should give us some color as to whether inflation is abating or if last week’s reports were not the beginning of the slowdown. As of Tuesday, the Job Openings report shows a slowdown in the number of jobs open. Powell & Company have a really tough job right now and they seem to be navigating by the stars under cloudy skies. Hopefully this week will give further clarity to the direction of the economy and interest rates. It may be that the Fed has done enough or maybe they aren't done just yet. What we do know is that Powell wants to slow economic growth, but not throw the economy into a recession where he would have to reverse the hard work he has done thus far. September can often be a month as difficult as August, particularly when a digestive period is underway. Thus far we are closing out August with the following:
- Earnings per share revisions for S&P 500 companies have returned to positive territory. This clearly doesn't scream recessionary forward earnings forecasts.
- Individual Investor Sentiment has gotten less positive as evidenced by the market decline. This in the face of earnings tends to mean a corrective period in a longer-term uptrend that is under way.
- GDP forecasts are no longer baking in negative GDP on a quarter-over-quarter basis. This tends to tell us that a recession isn't in the immediate future.
It doesn't appear that the coast is all clear, but it does look like the big move up that the indexes have experienced in the first seven months of the year has settled down to a certain extent and, if the S&P 500 should hold above 4200-4300, a higher high into the end of the year could very well be in the cards.
Please let us know if you have any questions or concerns. We are always here to help in any way we can.
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