U.S. equity markets closed out the month of August with little to show for themselves. In fact as a result of yesterday’s anemic performance the S&P 500 closed out the month in negative territory. All three major US equity indices lost ground on accelerating volume yesterday. The Dow Industrials led the way lower shedding 0.30%. The S&P 500 slipped 0.24% and the Nasdaq Composite lost 0.19%. Volume rose dramatically on the NYSE (+21.74%) and the Nasdaq (+11.02%). Yesterday’s negative price performance coupled with rising volume is an indication that my recent shift in outlook from “confirmed uptrend” to “uptrend under pressure” remains intact. Equity markets are on tenterhooks at the moment, residing fractionally below their respective 52-week and record highs, hardly the way you want to enter the month of September, a month notorious for delivering poor equity market performance.
Economic data releases loom large for investors with several dominant releases; Weekly Jobless Claims (c. 265k), Motor Vehicle Sales (c. 17.1M), Productivity and Costs (c. -0.6%) and (c. 2.1%), PMI Manufacturing, and the ISM Mfg. Index (c. 52.2). All of these releases matter but one rises in importance over the others: Productivity and Costs. In particular the “Costs” component of the equation because it speaks directly to inflation. Friday will be dominated by the Employment Report. Consensus is calling for a monthly gain of 175,000. If the cost component of the Productivity Report is hotter than consensus on Thursday and if Friday’s August Employment report reflects a meaningful gain over consensus of 175k, look for financials to outperform the broader market in the near term in anticipation of the increased likelihood of the Fed moving on rates - possibly this month.
If history is any indication:
My recent calls for caution in regards US equities will likely bear fruit this month, though the volatility I was expecting in August never materialized. Not only is September, historically speaking, the worst month of the year for equity market performance dating back to 1928, this year we have the added potential of event driven volatility being brought to bear by any number of themes but from two in particular - the U.S. Presidential election cycle and the vortex that the interest rate narrative has formed in recent weeks leading up to this month’s FOMC meeting. Other factors that investors will need to take into consideration this month include the G-20 Summit next week, the ECB Governing Council meeting, the results of the BOJ’s review of monetary policy and the OPEC meeting scheduled for month-end in Algeria.
As far as the political component of the equation in coming weeks, I am not smart enough to know whether the markets are expecting any particular candidate to win this fall’s elections but I am certain that regardless of who ends up in the White House, the road between September 1 and election night in November is likely to take investors for a roller-coaster ride.
In as much as anyone can predict the timing of the next interest rate move by the Fed, we can only read the tea leaves and watch the data closely. As of today, we know that the narrative laid out in Jackson Hole at the Economic Symposium held in August suggests that by most metrics our economic health, as measured by the rate of employment growth, relatively stable energy prices, near record auto sales and accelerating home sales/prices support a bump up in rates is on the table. The question is whether we see a single move or two by year end.
Legendary “Bond King”, Bill Gross is calling for the Fed to move twice by year end. I am fairly certain that though Fed Vice-Chairman Fischer indicated that was a possibility, it will not happen, unless of course data over the next four months reflects a significant uptick in inflation.
Thank you, have a great Labor Day weekend!