Is The Market Micromanaging September?
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We are about two weeks into September, and all eyes are still focused on the Fed and various measures of inflation. A month ago, many people were pretty sure serious inflation concerns had passed. ?After the equivalent of 22 quarter-point rate hikes and the biggest drop in the money supply since the Great Depression, consumer prices rose only 0.2% in July, with the year-over-year rate of increase down to 3.2. Today’s nemesis to this progression is oil prices. They have reversed course, and in a few days, the monthly increase in the August CPI will likely show inflation came in hot. If we are right that consumer prices rose 0.6% for the month, then consumer prices are also up about 3.7% versus a year ago—an acceleration. This brings me to the point of this week’s missive. I wanted to take the time to address what I feel are the most important “big picture” items on the minds of market participants:
I thought I would begin with something that seems to be bombarding everyone who chooses to read about the turmoil in the Fed and Washington, and the rumblings of this “alt-currency” better known as the new BRIC currency. Last week it was announced that the BRICS now has six new members: Iran, Saudi Arabia, Egypt, Ethiopia, Argentina, and United Arab Emirates. Combined, the BRICS share of the global GDP now surpasses that of the G7 nations. The world indeed looks somewhat equally divided between G7 and BRICS countries in terms of oil production and population. Since this is all really quite economically and politically based, this balance I find quite interesting at this point. See chart below:
It is stated that the BRICS is actively reducing reliance on the US Dollar. While this may eventually happen, the US dollar's global dominance will take significantly longer to topple than mainstream media would have you believe. Each BRICS country has its own geopolitical priorities and idiosyncrasies. Further, the US dollar accounted for around 90% of global forex transactions in 2022 and 59% of foreign exchange reserves in Q1 2023, surpassing the renminbi's scant 2.5% share. So, until BRICS countries can form a true synergistic alignment, the dollar will likely remain top dog. That said, a mega black swan where fiat currencies begin hyperinflating would also lengthen the time before something other than the US Dollar ends up becoming the world's sovereign currency.?
Speaking of the US Dollar, with the 10-Year US Treasury interest rate moving higher and trying to break up above 4.3%, the US Dollar should continue its rise. This suggests that more and more money from the sidelines (across the globe) is coming into the US Dollar and buying direct obligations of our Federal Government as it still stands as the safest currency on the planet. This rise in interest rates makes our debt, relative to debt throughout the world, more attractive particularly when looking at the economic slowdowns that are prevailing in the larger economies like China and Germany. The tradeoff is a breakdown in emerging market currencies and the Chinese renminbi. The negative of a stronger US Dollar and higher interest rates is a headwind for US export activity and a more difficult path higher for US stock prices. ?Below are two charts for perspective. The first is that of EPS revisions as of last week that show 58% of S&P 500 companies showing higher earnings expectations for 2024. The second is the chart of expectations for 2023 & 2024 GDP, both of which no longer show a recessionary contraction:
Both of these should be promising for US stock prices moving forward and makes the digestion in S&P 500 prices since late July seem like possibly more of a pause that refreshes. Below I show this “pause that refreshes” in a picture. The point I am making is that the S&P 500 Index chart looked like it was getting tired, then it got its energy back and in the last couple of weeks, I believe due to the higher 10-year interest rates, it has come back down once again:
September 2023 is proving to be consistent with other pre-election Septembers as being more dependent on individual security selection than broad market progression. I believe that “this time” it is more a function on interest rates and the US Dollar strength than anything else, but more importantly is being cautious and participating where best to participate. I wanted to also give you a timeline of what I am expecting in the continued drum beat into the 2024 presidential election with a partial timeline:
This leaves me with an updated comparison of what we are seeing post the interest rate / inflation messy crisis periods. Although the Pandemic and the Tech-Wreck were far different than the inflationary spike we have dealt with this time, I believe that how the market is reacting coming out the back end of the frictional period important to observe and watch for deviations. Here is where we stand currently:
In closing, the markets seem to be doing their typical August- October tug-o-war, which tends to culminate with a nice rally into year-end particularly in pre-election years. How this one pans out is anyone’s guess, but I do find the bulls to be in control when earnings are rising and the dreaded fear of recession turns into more of a soft landing. This week’s inflation measures of CPI and PPI along with the outcome of the labor union strike in the autos should lend a lot to how September could finish. We will remain alert and prepared for whatever the outcome might be.
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