September 9, 2024

“Although it is easy to forget sometimes, a share is not a lottery ticket… it’s part ownership of a business.”

Peter Lynch

Let’s all remember this after a lousy week (a technical term) last week, Markets usually rebound. Here are the numbers for the first week of September. The S&P 500 lost 3.64%, the Dow Jones Industrial Average relinquished 2.47% and the Nasdaq brought up the rear losing 5.44%. Internationally, not much better, the FTSE 100 lost 2.44% and the MSCI-EAFE was down 3.19%. The good news? The yield curve is no longer inverted. The 2-year paid last Friday 3.683% and the 10-Year yield was 3.74% the first time in years long rates were higher than short rates.

So, what spooked the market? As Barron’s Nicholas Jasinski reports: “Jitters Return. September trading kicked off with a familiar bout of growth fears last Tuesday, delivering the worst selloff since an early August scare. It was weak manufacturing data that served as the catalyst, right ahead of a batch of potentially consequential jobs figures.

The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index for August came in at 47.2 Tuesday morning, an improvement from July but worse than the consensus forecast. Regardless, it was the activity measure’s fifth-straight month below 50, in contraction territory. Under the hood, the New Orders subindex—which tends to be more of a leading indicator of future activity—fell to 44.6, its weakest level since”. (Remember our concern about leading economic indicators.)

As we commented before, September is historically a painful month when it comes to the stock market. The only bright spot is, except in a presidential election year. However, we are concerned as economic data and earnings point toward a growing chance of a recession. Remember just a few short weeks ago everyone was saying that the recession fears are unwarranted?

The latest evidence came from data on U.S. job openings Wednesday—which hit close to 7.7 million in July, falling from more than 7.9 million in June. Perhaps more striking was that the ratio of job openings to unemployed individuals stood at 1.07, below where it was immediately before the Covid-19 pandemic hit. The roaring U.S. jobs market was clearly slowing several months ago and might have worsened since. One other inconvenient fact, that American job seekers have lost 1.2 million jobs, while foreign born workers have seen an increase of 1.3 million new jobs, I wonder why? Government policy has consequences. It is then no surprise everyday Americans as still feeling the pain despite the rosey pronouncements from the government.

Some good news, such as it is? As I mentioned the yield curve is no longer inverted (meaning short term rates pay more than long term rates) The yield curve isn’t a neutral representation of economic conditions, it’s a reflection of market expectations. In this case, the most likely explanation is that traders think things are bad enough that the Federal Reserve will have to slash interest rates sharply. The pattern in previous cycles is that the yield curve turns positive shortly before the slowdown begins.

Also, As Market Watch reports, The U.S. trade gap hits highest level in more than two years in sign of consumer strength. The U.S. international trade deficit widened 7.9% in July to $78.8 billion from a revised $73 billion in the prior month, the Commerce Department said last Wednesday. This is the largest monthly trade gap since June 2022. Economists surveyed by The Wall Street Journal had forecast the deficit would widen to a seasonally adjusted $79.1 billion from the initial estimate of $73.1 billion. Imports rose 2.1% to $345.4 billion in July. The increase was led by capital goods and industrial supplies. Exports rose 0.5% to $266.6 billion.

We are working harder and I hope smarter, the productivity of American workers rose by a revised 2.5% annual rate in the second quarter, the government said last Thursday. The increase was originally put at 2.3% in the preliminary report last month. The improvement was expected by economists polled by the Wall Street Journal. Over the past year, productivity has increased by 2.7%. Unit labor costs rose by 0.3% over the same period.

Output, or the amount of goods and services produced, was somewhat stronger than previously reported. The increase was raised to a 3.5% rate from 3.3%. Hours worked rose at a 1% rate, unchanged from the prior estimate. Productivity is the key driver of long-term economic growth. It can also mute the inflation impulse from rising labor costs.

So, will the Fed cut rates on the 18th? The Street is betting it will but last week’s market uneasiness seems to indicate legitimate concerns about if or how much the Federal Reserve will cut rates. Vanguard seems to think so, they believe continued favorable inflation readings and softening of the labor market will likely move a September rate cut forward.

Vanguard expects shelter inflation to remain sticky for the rest of the year as supply expands slowly while demand remains steady. Further Vanguard likes large cap value, small cap value, REITS and non-US international stocks going forward, we obviously agree as we have added to those sectors and held what we had where appropriate.

On the inflation front, the coconscious is 2-3% by the end of the year but that fails to stress the damage to the personal budgets the past 3 years has collectively done. Until we get a change in economic policy reversing the deficit spend, printing of money and an economy with stead strong growth without governmental inflation policies we will have to continue to deal with these realities.

As you know the debate is tomorrow night on ABC and simulcast on FOX News, I would encourage all to take the time to watch and get all your friends and family to join you. The direction of the country and the economic consequence are very real as we all decide in this election where our future lies.

Finally, expect a rally today after such a poor week last week, we will see if things claim down and the historical precedent hold, but who knows what the effect of tomorrow debate will be on Wall Street’s psyche.

Mike