What began with a small routine consolidation to end July quickly turned negative in the first week of August following a slew of weaker economic data. The weaker data began with lower-than-expected manufacturing numbers (ISM Manufacturing Survey), higher weekly jobless claims, and a weaker than expected July jobs report. While the ISM manufacturing report has spent most of the last 18 month in contraction territory, characterized by readings below the 50 threshold, we have seen a steady deceleration in the last four prints. In the July jobs report the unemployment rate continued its rise to 4.3% officially triggering the Sahm rule. The Sahm rule is a recession indicator created by Claudia Sahm during her time at the Federal Reserve to be used as a mechanism to call for government stimulus. It is characterized by a half of percentage increase in the three-month average unemployment rate. Although it has a strong track record of predicting when the US is in a recession, even Ms. Sahm acknowledges that this time is probably different. That is mainly because the unemployment rate is rising more because of the increase in the size of the labor force rather than an increase in layoffs. The markets got spooked by the recent rise because historically when the unemployment rate begins to rise, it continues upward. The headline payroll number was also a big deceleration from the prior month, coming in at 114k jobs. Although that is much lower than the prints we have become accustomed to, its actually not far below the historical average of around 124k. It’s not uncommon for the US to see prints below 100k or even go negative from time to time. Part of the weakness may also have been attributed to the recent hurricane that hit Texas in July, which is another reason why the print didn’t overly concern me. I believe we are in a moderating economy, however I do not see recession as an eminent concern at this point. We may get there at some point, but we’re not there yet in my opinion. The selloff was further exasperated on the Monday following the jobs report which was accredited to the unwind of the Japanese carry-trade. Essentially what that means in English is, since the Japanese central bank raised rates, investors who were borrowing YEN and investing in foreign markets reversed those trades causing a global sell off in equities. The Japanese stock market opened lower by over 12% which made the S&P 500’s 5% decline at the open look minor. With the VIX (Equity market volatility indicator) spiking to 65, buyers quickly came in. At the lows of the day, the S&P was getting close to the official corrective territory of a 10% pullback, while the Nasdaq blew past that.
Throughout the week the market got much relief from better-than-expected ISM Services, continuing on this week with rather good inflation data and retail sales. From the lows last week through the close on Thursday the 15th the S&P is up over 7.5% and is only about 2% shy of it’s July highs. With the data that we have seen I see the chance of a September rate cut of .25% as likely. We will hear from the Fed Chair Jerome Powell next week at the Jackson Hole symposium, which is not an official meeting. I’m not sure if he’ll give the signal that they will begin cutting rates in September. This Fed seems terrified of committing to rate cuts too early, not wanting to make the same mistakes seen in the 1970s. My opinion is that they need to start cutting because economic growth is starting to become a bigger fear than inflation.
The technical picture looks fairly good in the near term. The S&P 500 has broken the downtrend from July and is back above all of its major moving averages. The momentum indicators have flipped back into positive territory but are not yet overbought on the daily RSI indicator. I think we could see some additional progress to the upside but expect volatility to stay elevated. The market is becoming increasingly sensitive to the economic data, and election uncertainty has certainly risen over the past month. Typically, in election years September and October tend to be weaker before having a post-election rally. Well see if the seasonals play out like history.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.