August was a tough month as I have been saying. Markets closed down 2%, not a change in direction, but I don’t like declines no matter what. Up until August 22nd, the S&P 500 was acting like it was going to take quite a drubbing. Then we got the much-anticipated earnings from the semiconductor behemoth that is the backbone of AI, and the much-feared comments from Jerome Powell at Jackson Hole. The earnings proved to be better than hoped and Powell, true to form, said once again that he was going to remain data-dependent and let the economy sort of percolate after the numerous rate hikes. He went on to say that he sits at the ready to do whatever is needed, but that he felt it might take some time for the higher rates to work their way through the system and doesn’t want to push too hard, and put the economy into a recession.
The important point is that last week's reports were, expectedly, important events as they would set the tone for the month of September. Historically, September actually is the worst month of the year for the markets. Yet I don't expect this to be the case this year as the negative expectations have been the result of continued and possibly increased inflation and interest rate expectations, and I believe that we could see inflation indications begin to lighten as the interest rate hikes work their way through the system. Last Friday we got labor numbers and, while minorly above expectations, they were not enough to make interest rates rise. In looking at the comments from the Atlanta Fed's Bostic, one of the Fed Governors, exclusive of energy (gasoline), food, and shelter, inflation is now down to approximately 2.6%. This is clearly moving in the desired direction of the Fed and shows the hikes doing as intended:
The next big hurdle is next week's September 12th, CPI report. If it is soft, or at least not overly strong, it should show the progression lower in inflation and this should then be positive for US stocks. The way to follow what the markets are expecting is this graph of the "expectations" of Fed hikes in September and November from Bloomberg. An institutional opinion poll is done, and this is then compiled to see graphically the probability of expectations of the Fed’s possible actions. As can be seen below, since the Jackson Hole meeting, the rate hike expectations keep falling lower and lower, and even after the jobs number last Friday they continue to decline.
This is super important!!! This could make the markets reprice stocks and bonds and therefore earnings expectations and the cost of capital. Think about it. If the decline in 2022 was the result of expectations of interest rate hikes in 2023, and 2023's advance has been the expectation of interest rate hikes not being overly recessionary on the markets and therefore bonds stop going down and stocks begin to rise once again, then if the Fed is done raising rates, then there are fewer headwinds in front of possible earnings growth and subsequently higher prices of companies. I want to take this thought and blow up the most recent action out of interest rates in the last couple weeks. As seen below, the 10-year US Treasury yield moved up to approx. 4.35%, at the worst point for the stock market, on August 22nd. Since then, rates have trailed back off. If they should go under 4%, the US stock market could take this positively and continue its 2023 progression, even during the hated month of September.
So now I want to focus on the month of September. Since 1950 there have been 73 years with September data. The average decline in September is -.3%. But if the markets are strong for the year through August (which this year has been) then September has not been bad, and the rest of the year has sort of used September as the month to provide the pause that refreshes prior to a fairly substantial run into the year-end. There have actually been 15 out of 73 instances where the performance of the markets into the end of August has been up greater than 15%. When this has happened, September has squeezed out a 1% gain and the markets have been strong into year-end 87% of the time for a gain of over 5% more. These are the parameters I sorted for:
- The market as measured by the S&P 500 went up over 15% through August.
- August being a down month.
- So, what normally happens in September?
- What normally happens into the end of the year?
What I come away with from all of this is that whether or not the S&P 500's advance is resuming right this moment, it is probably imminent that it rises into year-end. It should only be a matter of time as there is still SO MUCH CASH ON THE SIDELINES. The seasonal correction should go its course and the markets could continue their advance. The S&P continues to track its seasonal tendency. Looking at just the last ten pre-election years, an average composite of the S&P temporarily peaks in July, bottoms in late August, stabilizes through September, and resumes higher in October. Based on Ari Wald, Chief Technician of Oppenheimer’s analog, the markets tend to look like this:
I want to finish with one last comment. Think back to 1984. How much money did you and your parents have? What were you doing about interest rates? How scared were you that you couldn't afford anything given what the cost of money was? The stock market had been cratering and mortgages were around a 20% interest rate. Since then, we have experienced interest rates in a secular decline into 2020, and then the beginning of a move higher. This has scared investors into believing that stocks simply can't move higher in the face of higher interest rates, for various reasons. The difference "this time" is that there is a massive amount of cash on the sidelines that needs to find a home and isn't likely to sit in short-term US Treasuries and CDs for long. This is where the dilemma arises. The historical measures of inflation are being overshadowed by the continued increase in prices of discretionary goods at the gas pump, the supermarket, and at restaurants. At the same time, traditional industrial measures are showing slowdowns in growth rates. Which one ends up winning the tug-o-war? Can the economy slow or stop completely, and prices continue to rise? This could very well happen. This would be a conundrum for investors who aren't calculating the unending purchasing power of $5.5 Trillion of cash on the sidelines. It appears that Powell is masterfully measuring all of this, and so far, has been able to slow down inflationary problems without taking the economy into a recessionary status. If this can continue, Goldilocks could be our savior; not too hot, not too cold, but just right.
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