September 11, 2023
“The four most dangerous words in investing are, it’s different this time.”
Sir John Templeton
As we start this week, let us remember 9/11, lest we ever forget. That said, last week, on Friday, all three major U.S. stock indexes closed slightly higher, with the S&P 500 snapping a three-day losing streak. For the week Dow Jones Industrials Average was off .8%, the S&P 500 down 1.3% and Nasdaq Composite 1.9% lower. Internationally, the FTSE 500 lost .3% and the MCSI-EAFE was down 3.15%. Bond yields also rose this week, though the U.S. 10-year yield dipped slightly to 4.257% on Friday, and the 2-year Treasury closed at 4.98%
It was the worst week for all three indexes since the one that ended August. The Dow has fallen in three of the past four weeks. The S&P 500 snapped a two-week winning streak.
Financial markets are now bracing for what is likely to be a rebound in headline U.S. inflation this week, fueled by higher energy prices. “We will see a spike in gas prices and other commodity prices driven by supply cuts, which means headline CPI goes back up,” said Alex Pelle, a U.S. economist for Mizuho Securities in New York. Rising energy prices in August have already spilled into the month of September, with gasoline reaching the highest seasonal level in more than a decade this week. Voluntary production cuts by Saudi Arabia and Russia are a major contributing factor, curtailing the supply of crude oil into year-end, and Goldman Sachs has warned that oil could climb above $100 a barrel.
Continued pressure on CPI’s services component, mainly from rising wages and elevated shelter (rent and owner’s equivalent rent). The reality is that the final mile of the road toward 2% inflation will not be smooth and felt most by the middle class.
More good news? On the interest rate front, The Federal Reserve looks like they may pass on another increase in September, but a skip of rate hikes could be appropriate at the September meeting. Although, it does not mean the Fed will stop raising rates for good, said Dallas Fed President Lorie Logan on Thursday. That is in line with the market’s expectations. Futures traders have boosted the odds of unchanged rates at the Fed’s September meeting to 93% from 86% a month ago, according to the CME FedWatch Tool.
Still, the chance of another 25-basis-point hike at the subsequent November meeting is possible. The Federal Reserve will get a key data point this week with the release of August’s consumer price index. The central bank is widely expected to keep the headline interest rate steady through its September meeting, but the report could help inform future decisions. Vanguard Bond analysts believe a Federal Funds rate of 6- 6.25% is likely by the end of 2023. Not good for mortgages or borrowers.
Contrary to Vanguard’s opinions, Treasury yields finished mixed on Friday as fed funds futures traders priced in a 93% chance of no action by the Fed at its next policy meeting in less than two weeks, and a more-than-50% likelihood of the same for November and December — which would leave the Fed’s main policy rate target between 5.25%-5.5%. We feel this optimism flies in the face of data realities.
The European Central Bank will announce a monetary-policy decision on Thursday. Futures pricing is in favor of no change in interest rates.
This week, the latest inflation data will be the main event, coming right before the Federal Reserve’s September policy meeting. Several investor days, an Apple iPhone-unveiling event, and a European Central Bank interest-rate decision will be other highlights.
The Bureau of Labor Statistics will release the consumer price index for August on Wednesday morning. Economist consensus calls for a 3.6% year-over-year increase in the headline index and a 4.4% rise in the core CPI, which excludes food and energy components. On Thursday, the BLS will release the producer price index for August. Near 40%.
Though recession discussions have cooled recently, we still believe the data still supports it and we are not alone. If recession sets in, Treasury yields likely will fall. We also expect credit spreads to widen. Inflation should continue to moderate, mostly from a slowdown in the goods component of the Consumer Price Index (CPI). Nevertheless, we still expect core inflation to remain higher than the Fed’s 2% target. Orders for U.S. manufactured goods fell a sharp 2.1% in July, the Commerce Department said Tuesday. This is the first decline after four straight monthly gains.
The U.S. Treasury yield curve has been inverted since July 2022. This unusual slope is a time-tested recession indicator. An inverted yield curve has preceded every U.S. recession since the 1970s.
Again, stating the obvious, economists said that higher interest rates are putting pressure on business equipment spending. Durable-goods orders fell 5.2 % in July, unrevised from the data that was released on Aug. 24. Non-durable goods orders rose 1.1%. Orders for nondefense capital goods, excluding aircraft, rose 0.1% in July, also unrevised from prior estimate.
Other economic data out next week will include the National Federation of Independent Business’ Small Business Optimism Index for August on Tuesday, the Census Bureau’s retail sales data for August on Thursday, and the University of Michigan’s Consumer Sentiment index for September on Friday.
Finally, the current contract between the United Auto Workers and the Big Three automakers expires at 11:59 P.M. on Thursday. The UAW have authorized a strike if no contract is agreed upon by the deadline. The contract covers nearly 150,000 workers. The question remains, can the rank and file have the staying power to sustain the strike?
Is there any good news now?
So far, September is living up to its reputation as the worst month for the stock market. But the worst of the pain might have already passed. But take a step back and look beyond September, say analysts from Bespoke Investment Group. The worst of the late-summer turbulence might already be behind us, just one week into the month.
“Performance in the three months following the close on 9/8 have been among the best relative to any rolling three-month period throughout the year,”
We continue to be validated in our opinions on lengthening bond maturities, rotating to value (high dividend ) stock, and small and mid-cap value. We hope everyone had a great end of summer holiday and as we approach the 4th quarter our expectation is for a positive end to 2023.