- This week started with a hangover from Jackson Hole as investors continued to realize that the Fed may be more intractable than the bulls irrationally hoped for. Given that much of the sentiment-driven rally occurred during the day session it is not too surprising that this is also where hot air is coming out the fastest. This week large caps lost 3.56% during the day, while the night session gained 0.35%. Across small caps both sessions were down, but the day lost 4.33%, while the night was down just 0.39%.
- The focus this week was labor, and it started with Wednesday's ADP report that missed consensus expectations by more than half and came with words of caution that firms' hiring plans are becoming more conservative.?To our point above the initial before-the-bell reaction was positive but then sentiment soured during the day to end August in the red.
- After the close on Wednesday major US semiconductor names, namely Nvidia and AMD , disclosed that fresh regulatory restrictions are preventing them from exporting certain AI chips to China. Some speculated that, as most of the chips in question are made geographically close to China in Taiwan this export ban is designed to slap away Beijing's hand from reaching for the island. However, as?these chips have military applications and given that China has become the layover for supplies to Russia's war machine this move, while painful for investors, may prove prudent at preventing incremental bloodshed in Ukraine. Regardless of the rationale the news sent down all tech stocks, with the Nasdaq 100 falling 85bps overnight. During the Thursday day session we saw a sudden and catalyst-less reversal in the afternoon that again underscores the noise inherent in the day session.
- While stock bulls were sighing in relief at the close of Thursday on the bond side the bears were enjoying their biggest feast in over three decades. For the first time since index inception in 1990 the Bloomberg-Barclays Global Aggregate Bond index suffered a 20% drawdown from its January 2021 peak, buckling under the weight of inflation and the central bank policies aimed at stopping it. With both equities and fixed income falling in tandem through this secular regime of rising rates typical stock/bond portfolios are likely to continue failing at offering investors the protection of diversification. Indeed, the traditional 60/40 "balanced portfolio" is down over 15% this year, its worst performance since the depths of the 2008 credit crisis. Thus, we believe savvy allocators should seek alternative ways to curtail client risks.
- Friday before the bell it looked like markets were happy to see Nonfarm Payrolls (NFP) post a small beat in line with our forecast last week. However, as we've been telling readers it's rare to glean the whole story from the headline these days. While NFP did come in ahead of expectations, thanks to a strong bounce in manufacturing and retail jobs, investors may have actually been cheering the surprise tick up in the unemployment rate and the drop in wages.
- After the day session opened what can only described as pandemonium ensued - and we didn't have a Powell speech to pin the volatility on. The S&P 500 dropped 85bps, rallied 115bps, and then crashed 280bps before rebounding slightly into the close - all without any material news. Another example of how the day session is badly behaved - the tug of war between investor factions is most rowdy when cash markets are open.
- Regarding reactions to labor there are a few key themes investors should ruminate on during this long weekend:
- A few data points won't sway the Fed. It is a long road to hitting their sub 2% PCE inflation target, especially with so much of it now spilled over into stickier sectors.
- Powell could have been sharper in his words at Jackson Hole, but everything we've seen surrounding the symposium crystalized that to the FOMC a recession is an acceptable?and?likely byproduct of thoroughly eradicating inflation. The big question is just how painful this side effect will be, not whether we'll experience it.
- With that in mind good news should be taken at face value. The stronger our economy is when it hits the inevitable Fed-induced downturn the less downside risk to stocks we'll have. Consumer balance sheets matter more than corporate ones, as consumers drive over 70% over GDP, so a robust labor market is vital. Robust, however, does not mean overheated - and current data shows we're still smoldering.
- After the long weekend we're looking at a week that's shorter on days and lighter on key indicators than the last few.
- Soon after the bell on Tuesday we'll get a read on the services sector of the economy from PMI data. Deceleration there, especially across retail and logistic sub-sectors, can mean falling consumer demand. We expect that to be the case.
- Wednesday we'll get trade data. In line with our expectations of cooling consumers we expect to see imports fall, however exports may be down as well given that subsiding demand is a global phenomenon.
- Before the bell on Thursday we'll likely get a 75bp rate hike from the ECB. Even US-centric investors will benefit from listening to remarks of ECB President Christine Lagarde. What's happening across the Atlantic influences not only multinational US firms, but can also spill over into the broader US economy that will influence our central bank's policy stance later in September.
