Weekly Newsletter: September 2, 2024
Enjoy the long weekend, it will be the longest time this year to the next day off for Thanksgiving! What typically marks the end of the summer season is typically the beginning of a very busy economic calendar, with employment and surveys on manufacturing and service industries. A month ago, the jobs report came in well below expectations, culminating with the following Monday’s “crash” of 3% and calls for immediate rate cuts. A month later, the economy seems to be just fine. The markets have figured “certainty” in a rate cut when the Fed meets in a couple of weeks. The focus of the Fed has shifted over the last few months from inflation, which they are certain will get back to 2% annual increases, to the economy, which shows alternating good and bad readings. As long as job growth remains above roughly 50k, the Fed should not worry about the economy. If/when that growth slows or goes negative, watch the Fed become more aggressive about cutting rates.
The summer months are usually marked by very low trading volume as traders/investors are spending the warm months somewhere other than at their desks. Usually, the Friday before Labor Day is one of the slowest of the summer. The huge rally in the last 30 minutes on Friday was marked by the highest volume of the season. Does that mean September will start with a bang and new all-time highs are a layup? Maybe. Investor sentiment is already bullish, and momentum has been strong since the early August dump. That said, September, and to a lesser extent October, tend to be the weakest portion of the calendar. It can be argued that geopolitical events may be a bigger component this election season than those past. An opposing view would be if the financial crisis year of 2008 were excluded, election years tend to be positive heading into November.
For the fourth consecutive month, the bond market showed positive rates of return. Bolstered by talk of an interest rate cut, slower inflation rates, and modest economic growth, the 10-year bond has declined from roughly 4.7% in April to 3.9% today. As a result, mortgage rates have declined as well and investors have rotated into higher-yielding (junk) bonds figuring many companies will be able to refinance their debt at less onerous rates. Finally, one other indicator for lower rates, commodity prices, continue to be well-behaved, roughly the same as year-ago levels.
The markets have reverted to what has been “working” all year, the larger the stock, the better the performance. An interesting twist was that value beat growth in the large, mid, and smallcap asset classes. The performance difference was highlighted after the earnings report from Nvidia, which did beat expectations. The stock fell, but the markets rose overall as value stocks won out over growth. The shift toward value has been in very short stints and has not persisted for more than a few weeks or a month. The defensive portions of the SP500 were the better performers as well as investors took some money out of the tech sector. The weaker dollar during August allowed international stocks to do well. The dollar has traded in a range for much of the past two years between 101 and 106. Most of this has occurred while the Fed has held steady. If the Fed does follow through with its rate cut, the dollar could weaken a bit further as US interest rates get closer to those around the world.
As usual, the jobs report this month is “the most important report”, until the next one. The coming few months are likely to be volatile, but the overall direction is likely to be found from the economic data rather than the noise around the US elections.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.