As we anticipated, the second half of July pullback yielded a rather textbook election year August rally. Today’s selling notwithstanding, it has been quite a course correction from the August 5 lows. The market has been known to succumb to selling toward the end of August as The Street heads for the Hamptons and other getaways for the unofficial end of summer. In fact, we are closing the office next week and taking some time for a little R&R ahead of a likely action-packed yearend market and election season. We will check messages and email though.
September seasonal weakness and Octoberphobia looms large. But we have been hearing a lot of chatter about the seasonal troubles this time of year, so our contrary antennae are purring that perhaps there is just a bit too much negativity. But with the lack of clarity about the economy, the election and the Fed’s next move on interest rates, we still expect some chop and sideways action over the next 60 days or so with a likely test of the lows. But another steep August-October correction three years in a row is less likely.
Bullish election forces remain at play, but September and October are two of the worst months of election years – even excluding 2008. October is the worst month of election years for DJIA, S&P 500 and NASDAQ. NASDAQ has been up only four times in election year October since 1971 and down the last four straight. Since 2000 DJIA is up only one out of six in both election year September and October, S&P is up twice in election year September and once in October. While we do not expect anything sinister it is comforting to have Almanac Investors defensively positioned ahead of this notoriously volatile timeframe.
Biggest Job Growth Revision in 15 Years
It’s interesting how the obscure preliminary estimate of an upcoming annual benchmark revision to the employment statistics number appears to have spooked the market the past two days. Well, when it’s an adjustment of 818,000 jobs and the biggest since 2009 that’ll get your attention. It sure makes you wonder that maybe the job market hasn’t been as resilient as we were led to believe. How can we trust these stats if this revision is so large? We’ve been dubious of government statistics for years. Cases in point: Stock Trader’s Almanac 2024 page 32 “How the Government Manipulates the Economy to Stay in Power,” and our book Super Boom: Why the Dow Will Hit 38,820… (Wiley 2011) Chapter 9 “Inflation.”
This revision clearly gives the Fed cover to cut rates ahead of the election. We still believe we will only get a quarter point cut in September and the CME futures agree. And likely another one or two 25bp cuts this year, not the new overly aggressive rate cuts the fearmongers are perpetuating.
What we see here in the NY Metro area is plenty of hustle and bustle. I-95 is jammed all the time these days and so are the New York State Thruway, Garden State Parkway and New Jersey Turnpike. There was plenty of traffic going to and coming back from Newark Airport last weekend. Lots of folks heading “down the shore” too. The famous Asbury boardwalk was packed, the beaches crowded and long waits for tables at restaurants. Clearly the economy is not as rosy as the cheerleaders say. But it’s also not as dire as the naysayers. Perhaps the economy would be considered modestly satisfactory. There are clearly weak spots, but it is not falling apart either. Maybe we should call this the not-so-soft landing where there’s a little turbulence on touchdown.
Waiting for the Fatter Pitch
With all that has transpired in the past month, patience and prudence are clearly in order. At today’s close DJIA is still above 40,000 and up 8.0% year-to-date. S&P 500 is up 16.8%, NASDAQ is up 17.4% and while lagging and not hitting an all-time high in 2 years and nine months the Russell 2000 is up 6.1% this year. While market conditions may seem a bit tumultuous at the moment let’s remember how far we have come this year.
In the past month President Biden dropped out. We had a below average mid-July to early August
election year drawdown of 8.5% on the S&P and 13.1% on NASDAQ, culminating in a mini flash crash and turnaround on August 5. Now the steep snapback rally that brought us to within striking distance of the all-time highs looks like it’s run its course.
The market’s convention bounce may already be yielding to the realities of an uncertain election with all the gyrating economic data coming in, speculation on what the Fed will say at Jackson Hole and do at their next FOMC meeting on September 18 and other rhetoric swirling around The Street and financial media. Seasonality is coming into its historically weakest period of the year while geopolitics remains tense in Russia and Ukraine, the Mideast and the Pacific Rim. But macrotrends, technicals, internals, the US economy and election year forces remain supportive. So be patient, we are well positioned and ready for the fatter pitch later in Q3 or early Q4.
Pulse of the Market
Over the last five weeks DJIA endured a rollercoaster ride. From DJIA’s all-time closing high of 41198.08 on July 17 through its closing low of 38703.27 on August 5, it shed 6.1% and from that low to its recent high close on Monday August 19 at 40896.53 it climbed 5.7% (1). S&P 500 and NASDAQ endured even larger swings. Market volatility has historically begun to
pick up after mid-July and it certainly was the case this year as the VIX (CBOE Volatility index) spiked over 50 in early August.
DJIA recovered the bulk of its recent losses and VIX has retreated back under 20, but resistance appears to loom near DJIA’s previous high as positive momentum has faded. As of the close on August 21, both the faster and slower moving MACD indicators applied to DJIA remain positive (2). Without a breakout to new highs, a few more trading days of sideways and/or weaker trading could turn both MACD indicators negative and confirm the loss of positive momentum.
DJIA’s weekly streak without a Down Friday/Down Monday (DF/DM) ended with a thud at 15. The DF/DM also contributed to the end of DJIA’s four-week winning streak (3). Thus far, DJIA has avoided any additional meaningful weakness after the DF/DM, but with historically weak September and October just around the corner there is cause to remain vigilant and not rush to jump back into long positions.
Anticipated weakness after mid-July was notably stronger for S&P 500 (4) and NASDAQ (5) as they declined four weeks in a row before last week’s strong rebound. That rebound was the best weekly gain for S&P 500 and NASDAQ since the week ending November 3, 2023, when they gained 5.85% and 6.61% respectively. Another nine-week winning streak like the one that followed last November’s weekly surge is not likely as election uncertainty and Fed rate cut anticipation are likely to keep market volatility elevated in the near-term.
Weekly market breadth data remains rather mixed. NYSE Weekly Advancers did outnumber Weekly Decliners by a solid margin last week as one would expect (6), but in the second half of July Weekly Advancers exceeded Weekly Decliners as S&P 500 and NASDAQ declined. The mixed weekly breadth readings are likely due to the rotation out of tech and high-growth names into more interest rate sensitive stocks as longer-dated rates retreat.
Weekly New Highs and Lows over the past four weeks also appear to support the rotation theme as New Highs held up until the second week of August. New Lows did pick up, but the increase was generally consistent with the magnitude of the market’s retreat. Last week’s numbers for New Highs and Lows (7) trended in a positive direction with New Highs expanding and New Lows shrinking. Whether that trend can continue and build momentum remains to be seen.
With a September Fed rate cut seemingly nearly certain, yields on the 90-day Treasury and 30-year Treasury continued to decline over the last four weeks (8). The 30-year yield is at its lowest level since the start of the year while 90-day yield is at its lowest since last June. Falling interest rates should give the consumer some relief which does not hurt the probabilities of a soft economic landing.