Commentary for September, 2024

Hello all - we hope you had a nice September.

Stocks started the month with losses, but quickly turned it around to end the month with modest gains.  The Dow was up 1.3%, the S&P 500 rose 2.1%, and the Nasdaq, which has a higher concentration of tech stocks, gained 0.8%. 

Here’s a look at how the markets moved this month:

The end of September also marked the end of the third quarter.  Here’s a look at how the different sectors performed over that period.

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CENTRAL BANKS MOVE MARKETS

Central banks around the world could take the credit for much of the moves in the markets this month.

We’ll start with our Fed, who lowered the cost of borrowing by cutting interest rates 0.50%.  This is their first rate cut since 2020.

 

Much of the gains in stocks actually came in the days before the Fed meeting (the announcement was Sept. 18th).  Economic data like lower inflation levels supported the likelihood that the Fed would lower rates as much as they did, so stocks rose on that news in anticipation of the rate cut.

The announcement saw an initial jump in stocks, but the markets closed the month with little change from there.  

The other central bank making headlines was China.  The Chinese economy has slowed recently, so the policymakers announced a massive stimulus program to help the economy.  That boosted their market sharply to the highest in almost two years and also gave some support to markets around the globe.

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ECONOMY

We’ve heard a lot recently about how strong our economy is and how we’ve achieved a “soft landing” where we’ve avoided a recession.  However, the data we follow shows a recession is closer than ever.  

First, we’ll look at the yield curve, which is something we’ve talked about often.  We won’t go into specifically what this is, but the chart is what’s important.  

In the chart below, notice how the blue line dips down and pops back above that black horizontal line.  Every time this happens a recession follows (a recession is noted by the gray shaded area).  If history holds true, this chart suggests that a recession is very near.

Another recession indicator we talk about every month is the leading economic indicators.  This index combines several indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

This index continues to be negative, and it has never gone this long without a recession following.

Finally, another recession indicator we’ve probably never talked about before – art.  The performance of auction house Sotheby’s is viewed by many economists as a good barometer of economic health.  (It used to be publicly traded, but is no longer, making the indicator more difficult to follow)

As this article indicates, the art market is “tanking.”  This is another red flag to keep in mind.

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INFLATION

Let’s look at the inflation data from this month, where the annual inflation rate continues to move lower.

But that’s looking at inflation from an annualized measurement (counting the previous 12-month numbers).  When you look at inflation month-by-month, inflation is still rising, just not as quickly.  That means prices are still going up, just not as fast.

When excluding energy and food from the calculation (which economists call the “core” measurement), we can see inflation still rising solidly every month.

The PPI, which is the inflation at the business level before they pass on the price increases to us, rose again last month.   

Last is a chart that shows the real problem with inflation.  Every monthly inflation number builds on the month before, so every month prices are rising higher and higher.  After the pandemic, prices rose sharply and have continued to rise at a faster pace. 

Every time policymakers and the press cheer a “lower” inflation number, know that it’s a lie.  This is why so many Americans are hurting – price levels have risen rapidly and keep going higher.  

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OTHER ECONOMIC DATA

Getting into some other economic data released this month, the data was mostly positive but there were some areas of concern.  

The first concern was the level of job openings.  Job openings have declined steadily for the past year.  

It’s also concerning to investors because the level of job openings and the level of the stock market tends to move in the same direction, as we can see in the chart below.  Eventually that gap will close – but will it be because of higher job openings or a lower stock market?

As for the strength of the manufacturing and service parts of our economy, both saw a slight improvement last month.

Retail sales saw a slight increase on the month.

Durable goods (these are items with a longer life, like a phone or refrigerator) was flat on the month, but economists predicted a large drop, so this could probably be considered a positive.

Consumer confidence moved slightly lower:

Small business optimism moved lower, too:

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Where does the market go from here?

Almost identical to last month, we quickly went from oversold conditions in the market (cheap) to overbought (expensive).  This isn’t a place we’d be comfortable putting new money to work.  

Additionally, we are entering a very volatile time of the year.  October is a notorious month for the markets, and election years compound that volatility.  As the chart below shows, markets are historically lower this time of an election year, so we advise caution.

This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for August, 2024

Hello all - we hope had a nice August.

It was a mixed month for the markets, where a sharp drop at the beginning of the month and equally swift rebound left the markets with slight gains for the month.  The Dow was up 1.8%, the S&P 500 rose 2.3%, and the Nasdaq, which has a higher concentration of tech stocks, gained 0.6%.

Here’s a look at how the markets moved this month:

Volatility skyrocketed in the early days of August, but the quick selloff became a quick rebound and the volatility left as fast as it arrived.

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AUGUST MARKET

What was behind the sharp market decline and the rebound this month?

The sharp decline in the early part of the month had a few contributors, but we’d say it was mostly triggered by news out of Japan where they announced an increase in their interest rates.

This country has seen heavy stimulus for decades, really, and they recently started to pull back on the stimulus.  Their interest rates have been negative for 17 years, where they tried to force money out into the economy.  The economy has recently started to improve and their inflation has subsided, so they decided to step back from some of the extreme stimulus measures.

Why was a rate increase in Japan important to our market?  Since it is so cheap to borrow money there, many investors here in the US borrow money cheaply in Japan.  They then use that money to invest in the stock market.

That increase in Japanese rates gave a shock to those investors and they sold stocks quickly as a result.  

At the same time, the U.S. saw disappointing economic data where the employment figures were much lower than expected.  You can see in the chart below how the number of jobs added have been decreasing.  

This caused investors to also worry that a slowdown in the economy was coming and a recession was near. 

Additionally, we learned the employment picture was even worse than reported.  

First, every month these numbers are reported, but the following month they are almost always revised lower.  Second, we learned this month that more than 800,000 of these jobs were being removed entirely due to a calculation error.  The jobs picture is far worse than originally thought. 

As the market was falling, investors started to realize that maybe the bad news was good news for the market.  

The Fed appears highly likely to cut interest rates at their next meeting.  The minutes from their most recent meeting gave the strongest indication yet that a cut was coming.  Additionally, most Fed speakers making comments this month said the time has come for cuts.  

The markets were encouraged by the news and started their climb higher.

The only question now is how much they will cut.  It feels like the market is looking for a 0.50% cut at their upcoming meeting in September.  However, the Fed may be more inclined to do a 0.25% cut.  This could be an issue the market grapples with in the coming weeks.  

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INFLATION

Let’s look at the inflation data from this month.  

The annual inflation rate ticked lower again this month, with the headlines celebrating that the inflation rate now had a ‘2’ handle with inflation growing 2.9%.  

But that’s looking at inflation from an annualized measurement (counting the previous 12-month numbers).  When you look at inflation month-by-month, inflation is still rising, just not as quickly.  That means prices are still going up, just not as fast.  Any regular shopper could tell you that.

When excluding energy and food from the calculation (which economists call the “core” measurement), we can see inflation still rising every month – just not rising as much as before. 

The PPI, which is the inflation at the business level before they pass on the price increases to us, rose again last month.   

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ECONOMIC DATA

We’ll start with some general economic observations.  

What we’re seeing from corporate earnings reports is that people on the higher end of the income spectrum are doing fine.  It’s the lower-income Americans that are doing poorly.  Many companies that serve this demographic have cited a major slowdown from these shoppers as they have been hurt by higher prices.

As costs go up, many people are turning to their credit cards.  We’re starting to see more people late on their credit card (and auto) payments, as well.  The level of late payments tends to rise around recessions.

Another recession indicator we’ve talked about often is the yield curve.  This topic can be wonky and we won’t get into exactly what this is, but the important part is the chart below.  When the yield curve (the blue line) starts rising again, recessions are almost always around the corner.

A recession indicator we talk about every month is the leading economic indicators.  This index combines several indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

This index had been lower for 22-straight months before finally turning higher five months ago.  Unfortunately, that positive report is looking like a one-off as the index continues to deteriorate.  This report is a good recession indicator, but it hasn’t been very good at telling us ‘when’ the recession will arrive.   Regardless, it remains an important indicator to follow.

The manufacturing part of our economy was looking like it was improving; however, the last four months showed a decline as it moved back into contraction territory (a number below 50 indicates contraction).   

On the other hand, the service side of our economy took a turn higher last month.

Retail sales saw a nice gain on the month. 

 

Durable goods (these are items with a longer life, like a phone or refrigerator) saw a solid improvement, too.

Although, that rise in durable goods was due to a few large aircraft orders.  Take those away and durable goods were actually lower.:

Consumer confidence moved slightly higher:

Small business optimism moved nicely higher, too:

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Where does the market go from here?

We quickly went from oversold conditions in the market (cheap) to overbought (expensive).  Normally we’d be pretty cautious here, but an interesting note is that these quick gains often see even more gains, so its possible the market can keep going higher.

However, September and October tend to be very volatile months, especially in election years.

Further, all eyes will be on the Fed this month and their expected rate cut.  While investors are excited to see easier conditions, the market often falls after the first rate cut.  As you can see in the chart below, a lower Fed Rate (the blue line at the bottom) tends to see the market fall right after.

 

We’d remain cautious here.




This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for July, 2024

Hello all - we hope your July was a nice one.

The markets started the month strongly, but later declines saw stocks close the month relatively unchanged.  The major indexes again saw a wide divergence in performance, with the Dow up 4.4%, the S&P 500 rose 1.1%, and the Nasdaq, which has a higher concentration of tech stocks, was lower by 0.8%.

 

Here’s a look at how the markets moved this month:

Here’s a look at how the various sectors performed.  Notice how many of the sectors performed well?  And notice how poorly the market return was for the month…

Volatility in the markets ticked up sharply this month.

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July was a very odd month for the markets.

We’ve commented for many months about how unhealthy the market was.  A handful of very large companies – all tech companies – are driving the direction of the market.   Microsoft, Apple, and Nvidia alone make up more than 20% of the S&P 500 index. When these stocks go up, the market goes up.  However, this month we saw that the opposite is true.  
 
Investors sold out of these high-flying stocks and put money into the other stocks that have not performed as well.  The stocks of these tech names fell sharply and that  caused the overall market to also fall sharply several times this month.  It was odd because while these tech names were all lower, the rest of the market was green.

Below is an image of a heatmap from just one day, showing what stocks are up and the ones that are down.  We see red in the big tech names, but green in most other names.  We can see how big hose red boxes are, though, which shows how much impact they have on the overall market.

We didn’t find the declines in the markets very concerning.  The money didn’t leave the market – it just rotated into other areas of the market didn’t perform as well.  We see that as healthy.

We’ve talked about the “equal-weighted” index before.  It looks at the S&P 500, but it gives every stock the same weighting.  This index performed very well this month, showing a healthy market.

Small stocks did very well, too, as a lot of new money moved into smaller companies that have lagged behind the overall market.  The Russell 2000 Index of small cap stocks saw a gain of about 10% this month.

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INSIDER SELLING

One interesting note has been the amount of corporate insiders (like executives and board members) who have been selling rapidly recently.  Its always good to be aware of what the insiders are doing. 

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EARNINGS

We’re about halfway through earnings season as companies release their results from the latest quarter.  

Earnings have actually been pretty good.  Companies are on track to see their earnings grow 9.6%, which is above the original estimate of about 8.8%.  Additionally, revenue (what the company makes before the costs are subtracted) has grown by 5%.  These are pretty solid numbers.  

However, the market has not been very generous in rewarding the good results.  There remains concerns about slowing growth in the coming quarters as more companies warn about a slowdown in sales as higher costs leave shoppers with less money to spend.  

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FED

The Fed held another policy meeting this month and announced no changes to their economic policy right now, as expected.  

However, they did seem to lay the groundwork for a rate cut at their next meeting in September.  A rate cut acts like a stimulus for the economy because it lowers borrowing costs so people and governments can borrow more money to buy more “stuff.”  The markets like stimulus and rose as a result. 

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INFLATION

Let’s look at the inflation data from this month.  

The annual inflation level saw a nice improvement this month as inflation ticked lower.  For the first time in four years, there was a month where inflation actually declined! 

 

Here’s a look at the monthly chart, where we can see that monthly decline in inflation.  I guess we can actually call it “deflation.” 

It was also a lower level of inflation when excluding energy and food from the calculation, (which economists call the “core” measurement). 

The PPI, which is the inflation at the business level before they pass on the price increases to us, was the outlier and it showed an increase in inflation.

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ECONOMIC DATA

Economic data released this month was mixed, but leaned negative.

We’ll start with the leading economic indicators, which we’ve talked about for many months.  This index combines several indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

This index had been lower for 22-straight months before finally turning higher four months ago.  Unfortunately, the positive report is looking like a one-off, as the index continues to deteriorate.  This report is a good recession indicator, so it is an important one to watch. 

 

The manufacturing part of our economy was looking like it was improving; however, the last three months showed a decline as it moved back into contraction territory (a number below 50 indicates contraction).

The services sector showed a surprisingly sharp drop, too.

Retail sales were exactly flat on the month.

Durable goods (these are items with a longer life, like a phone or refrigerator) showed a nice improvement. 

Consumer confidence moved slightly higher:

Small business optimism moved slightly higher, too:

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Where does the market go from here?

We reached very oversold levels in the last week of the month, and it was a good time to do some buying as the market rebounded quickly from those lows.  It looks like there could be some more room for markets to run higher.

This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.