Stocks spent most of last week bleeding steadily lower before closing at new, one-month lows on Friday after the release of the latest jobs report. For the week, the S&P 500 dropped about 3% and the NASDAQ gave up around 4%. Both indexes are now at their lowest levels since July 26th.
Markets started the week in a dismal mood, still reeling from Fed chair Jerome Powell’s fire-and-brimstone speech the previous Friday that effectively ruled out an imminent Fed pivot away from interest rake hikes and literally warned of “pain” in the economy. This (frankly bizarre) pivot theory was baked into prevailing stock prices before the speech and therefore an entire price re-set was needed once the theory was finally exposed as nonsense and it is that which caused stock prices to fall so precipitously across the board.
What Powell’s speech showed, and what the market spent most of last week digesting, was that the Fed would clearly rather over-deliver on interest rate hikes and trigger a recession than under-deliver and risk inflation becoming entrenched at its current high levels. Investors were told in no uncertain terms to stop believing the silly narrative that interest rate cuts were just around the corner. It simply ain’t happening.
The Labor Department’s monthly Job Openings and Labor Turnover Survey (JOLTS) found that job openings held steady and layoffs were little changed last month, in signs of strength for the US job market, which would further support the Fed's case for higher and faster rate hikes.
Chairman Powell’s foot-soldiers were out on stages throughout the country and on the airwaves, pushing the agenda using their favorite weapon; Fed-Speak. Minneapolis Fed President Neel Kashkari said that he was “happy to see” the market’s distinctly negative reaction to Powell's comments, asserting that lower stock prices now more accurately reflect the central bank's policy intentions.
Cleveland Fed President Loretta Mester said she wants to see several more months of data before saying inflation has peaked and she could not have been more explicit when she said; “I think we’re going to have to move them [interest rates] up .. above 4% and probably need to hold them there next year.”
Given the negative pile-on, it’s not surprising that investors found geo-political reasons to get anxious about, following reports of Taiwan firing live rounds at a Chinese drone flying in its airspace and the fact that Beijing authorities put the city of Chengdu (population: over 20 million) into a COVID lockdown, reminding markets that a Zero-COVID policyis still in effect in that country, which is not good for stocks anywhere.
On Friday, the Labor Department reported that the US economy gained 315k jobs last month, down from July's revised gain of 526k, but a little above the anticipated level of 300k. The unemployment rate ticked up to 3.7%, from 3.5%. All pandemic job losses have now been erased, there are now more people in work than there were in February 2020.
By sector, gains were strongest in the professional and business services sector. Education, health service and retail jobs also rose significantly. Job gains in manufacturing were more modest. The report indicates that employers are continuing to hire, despite the impact of a slowing economy and aggressive interest rate hikes.
The initial market response was positive, maybe the numbers had hit a “Goldilocks” sweet spot, but within an hour of the market open the bleeding had resumed as it seemed to dawn on investors that all this “good” jobs data really did was to simply raise expectations that the Fed could continue to double down on its aggressive interest rate policy.
In this week’s EXPLAINER: FINANCIAL TERM OF THE WEEK, I talk about and explain the concept of the inverted yield curve and what messages it sends to the markets. The most normal points of comparison are the 2 year yield versus the 10 year yield. But an even more powerful “recession is coming” signal is if/when the 3 month yield goes above the 10 year. This closely-watched spread has been flattening for months now and we are presently not a million miles away from the rates crossing over, which would be viewed as highly significant if it happens.
Attention now very much shifts to the next release of inflation data at 8:30am on Tuesday, September 13th. Trading between now and then is going to largely depend on how investors want to position themselves going into that announcement.
Oh, and September is historically the worst-performing month of the year for US stocks. Past is definitely not prologue, but I’m just saying.
OTHER NEWS:
Gloomy CFOs .. Chief Financial Officer (CFO) expectations have notably worsened this quarter, according to Deloitte’s latest quarterly CFO Signal Survey. Close to half of surveyed CFOs expect the North American economy to be in recession by the end of the year, while 39% expect the North American economy to be in a period of stagflation. Only a third of CFOs rated the current North American economy as “good” or “very good,” a steep drop from just last quarter’s 52%. Sentiment for conditions abroad was even worse, with just 7% of CFOs viewing conditions as good or very good in Europe, China, and South America. The dampened outlook is leading CFOs to reduce spending, and cut their growth expectations for wages and hiring.
The crypto sleaze hits just keep on coming .. The DC attorney general announced that he is charging Bitcoin evangelist Michael Saylor with tax fraud, claiming he has avoided paying taxes on “hundreds of millions of dollars” of income, in an elaborate scheme whereby he falsely masqueraded as a Florida or Virginia resident.
Microstrategy, the company founded by Saylor, which owns more Bitcoin (over 129k coins) than any other entity in the world (nearly 3x what Tesla owns), is also being charged with conspiracy to commit tax fraud in that it is alleged that the firm assisted him with his scheme. Microstrategy’s former CFO, Mark Lynch, is also being charged with the same crime.
Natural gas trouble ..On Friday, Russian energy supplier Gazprom “discovered problems in its key pipeline” that delivers natural gas supplies to Europe. The company said it wouldn't be able to restart operations at the weekend, following routine maintenance, as originally planned. In fact, Gazprom said it was “unsure” when operations would restart.
This sparked fears that a lack of gas supplies in Europe would force countries there to find alternative supplies even faster than planned. The result could push prices higher in the US, causing a rebound in inflation growth.
UNDER THE HOOD:
A tremendous amount of technical deterioration has taken place in the last couple of weeks since the market’s August 16th recovery high. Since that date, Buying Power has plummeted 42 points, far outpacing the 30 point rise in Selling Pressure indicating a remarkable withdrawal of motivated buying interest in US stocks.
On Wednesday, Selling Pressure crossed back into the dominant position above Buying Power. This signal, along with the recent intensity of the selling and other accumulated evidence increases the probabilities of a return to the market’s June 16th low, or even lower.
Important indicators of Demand trends are tumbling back to levels typically associated with an acceleration of market pullbacks, not the end of them. Also of concern is the fact that last week’s down-days coincided with a return to average or even above-average trading volume (indicating increased conviction among the sellers) after weeks of very depressed volume levels (less conviction) during which the indexes mostly moved higher.
In the near term, most short term indicators are now fully over-sold. This is likely to spark a brief relief rally very soon, but indicators of shorter and medium term Demand trends that are still rolling over do not provide much hope that such a rally will be any more than simply a pause in the current overall trend of sinking stock prices.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
U.S. stock and bond markets will be closed on Monday for Labor Day.
It’s a very light week for earnings with DocuSign, GameStop and Kroger the major reporters. Apple will host a product launch event on Wednesday, when it is expected to unveil a new lineup of iPhones and Apple Watches.
The biggest economic data release this week is the Services Purchasing Managers’ index for August on Tuesday. The consensus estimate is for the index to decline by about three points, to 54, which would keep it just about in positive territory.
The European Central Bank will announce a monetary-policy decision on Thursday. Futures markets are pricing in the greatest odds of a 0.75% hike, bringing the benchmark interest rate up from 0.00% to 0.75% in an attempt to combat what is swiftly becoming an energy and cost of living crisis in Europe.
Federal Reserve regional presidents will continue to give speeches and interviews next week (“Fed-Speak”) and the markets will be listening closely to what they say and even how they say it. Their utterances could well have the most impactful influence on the stock market between now and the release of US inflation data on September 13th.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 22% (down from 33% the previous week)
→Neutral: 28% (down from 30% the previous week)
↓Bearish: 50% (up from 37% the previous week)
Net Bull/Bear spread .. ↓Bearish by 28 (Bearish by 4 the previous week)
Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Weekly sentiment survey participants are usually polled on Tuesdays or Wednesdays
Source: American Association of Individual Investors (AAII).
LAST WEEK BY THE NUMBERS:
finviz.com
Last week’s best performing US sector: Utilities (two biggest holdings: NextEra Energy, Duke Energy) - down 0.6%
Last week’s worst performing US sector for the second week in a row: Technology (two biggest holdings: Apple, Microsoft) - down 4.9%
The NASDAQ-100 fell by more than the S&P 500
US Markets fell by more than International Developed Markets but less than Emerging Markets
Not much in it, but Large Cap stocks did less badly than both Mid and Small Cap
Growth stocks performed worse than Value
The proprietary Lowry's measure for US Market Buying Power is currently at 158 and fell by 18 points last week and that of US Market Selling Pressure is now at 163 and rose by 15 points over the course of the week.
SPY, the S&P 500 ETF, remains below both its 50-day and 90-day moving averages and well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 36. SPY ended the week 17.9% below its all-time high** (01/03/2022).
QQQ, the NASDAQ-100 ETF, remains below both its 50-day and 90-day moving averages and well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 35. QQQ ended the week 26.9% below its all-time high** (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
ARTICLE OF THE WEEK:
This week .. In Tales from the Dark Side, Barry Ritholtz talks about the two worlds of investment advice. The right way, fiduciary Registered Investment Advisors (RIAs) like Barry’s firm and Anglia Advisors with a responsibility to operate in the client’s best interests and never pushing any kind of product sale.
And the dark side, the way 85% of financial advisors operate in this country; a commission-hungry, transactional business model that prioritizes what’s best for the advisor and the advisor’s firm over any of the client’s interests and charges obscene and unjustified fees for getting their clients buy as much as possible of usually underperforming and unsuitable rubbish investments.
Those of us on Team RIA are stealing business from the transaction-obsessed, commission-grubbing crowd every year and we will continue to do so at an accelerating pace. Do you know which side your financial advisor is on?
EXPLAINER: FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia to try to help explain Wall Street’s gobbledygook (may be edited at times for clarity) .
INVERTED YIELD CURVE
[The yield curve is currently inverted and has been since early July, with 10 year Treasury interest rates as of Friday about 0.20% lower than 2 year rates]
An inverted yield curve describes the unusual drop of yields on longer-term debt below yields on short-term debt of the same credit quality, an inversion of the much more common opposite scenario.
Sometimes referred to as a negative yield curve, the inverted curve has proven in the past to be a relatively reliable lead indicator of a recession.
The yield curve graphically represents yields on similar bonds across a variety of maturities. It is also known as the term structure of interest rates. For example, the U.S. Treasury daily publishes Treasury bill and bond yields that can be charted as a curve.
Analysts often distill yield curve signals to a spread between two maturities. This simplifies the task of interpreting a yield curve in which an inversion exists between some maturities but not others. The downside is that there is no general agreement as to which spread serves as the most reliable recession indicator.
Most commonly, the yield curve slopes upward, reflecting the fact that holders of longer-term debt have taken on more risk and are therefore more highly rewarded by earning higher interest.
A yield curve inverts when long-term interest rates drop below short-term rates, indicating that investors are moving money away from short-term bonds and into long-term ones. This suggests that the market as a whole is becoming more pessimistic about the economic prospects for the near future.
Such an inversion has served as a relatively reliable recession indicator in the modern era. Because yield curve inversions are relatively rare yet have often preceded recessions, they typically draw heavy scrutiny from financial market participants.
Academic studies of the relationship between an inverted yield curve and recessions have tended to look at the spread between the yields on the 10-year U.S. Treasury bond and the three-month Treasury bill, while market participants have more often focused on the yield spread between the 10-year and two-year bonds.
Federal Reserve Chair Jerome Powell said in March 2022 that he prefers to gauge recession risk by the difference between the current three-month Treasury bill rate and the market pricing of derivatives predicting the same rate 18 months later.
It should be noted that while an inverted yield curve has often preceded recessions in recent decades, it does not actually cause them. Rather, bond prices reflect investors' expectations that longer-term yields will decline, as typically happens in a recession.
SIMON@ANGLIAADVISORS.COM | WWW.ANGLIAADVISORS.COM | FOLLOW ANGLIA ADVISORS ON INSTAGRAM
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