When September Ends...
As usual September proved difficult to navigate in the markets as professional investors returned from the summer and look to position portfolios going into the year end. It was however even more difficult given the continued fears over persistent inflation and the rising interest rates by central banks to stall it in its tracks. We also saw an increase in volatility due to the US Congress looking to avert a government shutdown. Finally, last weekend they managed to kick it down the road again for another 45 days.
As of yesterday, we are now just into the Yellow Zone in our mid to longer term indicator. Shorter term however our Price Action Charts - or Footsteps - have has us deep into the Yellow Zone for a couple weeks and have us currently sitting on approximately 40% in cash and alternatives as of writing.
Interestingly the market pullback and recent pullback in oil in just the last few days, looked to be exactly the medicine needed to give the US Fed and other central banks the leeway to begin to freeze further rate increases and even consider reversing the trend.
Then this morning there was a surprising jobs numbers and stronger than consensus. See article below:
BMO Economics EconoFACTS: U.S. Payroll Growth Soars in September Exceeding Forecasts
Ph.D., Chief U.S. Economist
This was an extremely strong U.S. employment report that, along with recent economic data, suggest a significant acceleration in economic activity in the third quarter. As of September, the U.S. economy was still growing well above its long-term potential rate. It also keeps the probability of another rate hike from the Federal Reserve very much on the table at the upcoming October 31/November 1 meeting. Click here for full report
One would have expected this report should have sent markets lower given the likelihood it provides for at least one more rate increase. But as of writing, markets are still flat and even pushing higher since the news was released. Thus, indicating one more increase was either already priced in, and or investors already believe markets have fallen enough and are already successful in finding a bottom.
US stocks, particularly the Growth stocks which continue to lead the market, had already looked like they found and held the August bottom. With today’s report, this is looking even more plausible. Markets that do not drop on bad markets are either strong markets from here or in a state of satisfied equilibrium. Should the central banks now be comfortable where rates and inflation sit, then the bottoming process is likely now in. It is currently looking like markets are oversold, which could provide further indication that this is true (assuming there are no other major negative catalysts).
The major and most immediate risks going forward are still that further reports could indicate that inflation is stickier than central banks would like to see, and that there is still a possibility for a recession and even a harder landing than expected. Secondly, there is the risk that the US political climate at the revised renewal date next month adds once again to volatility.
We consider the recent declines have moderated inflation concerns. With an election in the US just over a year away, both sides of the political aisle will be eager to avoid looking like the spoilers and risk shutting the government down. Note also historically, we are in the third year of a presidential cycle and they do tend to end strong,
We should see markets possibly move sideways for a short time here, but generally to begin to move higher before month end and into the typical seasonal effects and a Santa Claus rally.
In this regard, we also provide these comments from EquityClock.com:
Stocks rebounded on Wednesday given the reprieve in the rise of interest rates and the US Dollar that has burdened risk assets in recent days. The S&P 500 Index closed with a gain of eight-tenths of one percent, continuing to hold above the significant band of support around 4200. Momentum indicators continue to attempt to bottom, lending itself to the view of downside exhaustion, conducive to a bounce in the near-term. Resistance can be pegged overhead at declining 20 and 50-day moving averages at 4374 and 4435, respectively. The benchmark has achieved a logical downside target attributed to the normal correction/period of weakness that plays out in August and September and the risk-reward remains setup well to see a near-term upside attempt. The sustainability of the rebound remains in question given the rising trends of rates and the US Dollar, but, with both at overbought extremes, a similar retracement of the prevailing trend appears likely. The status quo suggests that weakness in rates and the dollar are bullish for stocks, while strength is perceived to be a bearish headwind.
Bottom Line: Recent weakness though uncomfortable, has actually given cover to consider inflation increases may be subsiding. We may still see one more rate increase, which looks to be priced in already. Further rate increases may no longer be on the table. In this environment, stocks and particularly the Growth Stocks, appear to be confirming a bottom process and begin to move into seasonal tendencies and a rally into the year end.
Should markets hold here as the Price Action charts are currently indicating a bottoming, then we expect to be fully reinvested to maximize the upside.
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