Headwinds now, but expect tailwinds to prevail in Sept. Upward revisions in profits strongest argument against recession.

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We discuss: How headwinds of VIX, yields, apprehension are growing.  But tailwinds are emerging this month as well.  The most notable is EPS revisions inflected positive and along with other factors is the reason we see probabilities of a better finish to Sept.

Please click below to view today’s Macro Minute (Duration: 5:13).

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In recent conversations with institutional investors, it is clear to us that investors are incrementally nervous. Foremost is their concern that economic momentum has been improving at a pace that might warrant the Fed to have to increase the path of hikes. This is a “good news is bad news” view and the rise in the ISM services, low jobless claims and even the GDP forecasts (many point to the Atlanta Fed GDPNow).

• This has pushed up the odds of a November hike to 39% (backed off from 43% earlier this week) and followed by higher 10-year interest rates and push higher in the VIX. These are all things we have been watching closely, but the VIX is probably at most risk of surging and this could put near-term pressure on stocks.
• Mark Newton, Head of Technical Strategy, notes that the VIX today posted a confirmed DeMark TD Sequential Buy Set up (daily) with a close above 13.88. If the setup is confirmed, this could lead to a VIX surge and naturally, near-term pressure on stocks.
• Many equity desks have been sending around charts showing that the VIX seasonally starts to rise in Sept to Oct, so this is essentially the base case. And Bloomberg (twitter.com) notes that a trader bet that the VIX could surge to 180, but this was a mere $30,000 bet. This bet could have a huge payday, however, if such a surge materializes.
• But there is a list of tailwinds building as well. This is what tilts us towards expecting a positive September:
  – S&P 500 profit estimates are rising in 3Q23, first time in 2 years
  – Fed officials seem to be shifting away from data dependence
  – Manheim (9/8) and CPI (9/13) should be soft
  – plus: Put-call ratio is elevated, highest since March 2023
  – Cyclicals are leading with Energy/Tech/FAANG the best sectors past 1M
• The upturn in S&P 500 profit estimates is a strong argument the US economy is slipping into an expansion. While some might argue this will lead to the Fed having to increase pace of hikes, this is not necessarily the case.
• The Chicago Fed published a study (link –> here by Stefania D’amico and Thomas King) suggesting the current hikes in place are sufficient to bring inflation back onto target. And while this is a staff study, it should carry some weight with FOMC which will meet later this month. Moreover, even NY Fed Williams even stated “monetary policy is in a good place.”

Bottom line: September is proving to be challenging again, but the tailwinds should prevail later this month

For much of 2023, the S&P 500 has been a game of inches. In fact, this market sounds a lot like how my anaesthesiologist doctor friend describes his practice:

• periods of sheer boredom, followed by bursts of panic
• This describes the S&P 500 in the past few months. And it seems like incoming macro data and specific earnings reports are those triggers of sizable moves.
• Friday is Manheim used vehicle index (expected weak) and 9/13 is August CPI.
• We expect core CPI to come in at +0.20% MoM or so, representing 3 consecutive months of exceptionally low core CPI. Will the Fed be swayed?
• The key is whether the Fed remains data dependent.
• But in the meantime, our top 3 sector picks remain:
  – Technology/FAANG QQQ 0.19%  XLK 0.35%
  – Industrials XLI 0.07%
  – Energy XLE -0.55%  OIH -1.19%  XOP
  

SECTORS: Cyclicals leading…

Key incoming data September

•  9/1 8:30am ET August Jobs ReportTame
•  9/1 10am ET August ISM ManufacturingTame
•  9/6 10am ET August ISM ServicesMixed
•  9/6 2pm ET Fed releases Beige BookTame
•  9/8 9am ET Manheim Used Vehicle Index August Final
•  9/8 2Q23 Fed Flow of Funds Report
•  9/13 8:30am ET August CPI
•  9/14 8:30am ET August PPI
•  9/15 8:30am ET September Empire Manufacturing Survey
•  9/15 10am ET U. Mich. September prelim 1-yr inflation
•  9/15 Atlanta Fed Wage Tracker August
•  9/18 8:30am ET September New York Fed Business Activity Survey
•  9/18 10am ET September NAHB Housing Market Index
•  9/19 Manheim September Mid-Month Used Vehicle Value Index
•  9/20 2pm ET September FOMC rates decision
•  9/21 8:30am ET September Philly Fed Business Outlook Survey
•  9/22 9:45am ET S&P Global PMI September Prelim
•  9/25 10:30am ET Dallas Fed September Manufacturing Activity Survey
•  9/26 9am ET July S&P CoreLogic CS home price
•  9/26 10am ET September Conference Board Consumer Confidence

Key incoming data August

• 8/1 10am ET July ISM ManufacturingTame
• 8/1 10am ET JOLTS Job Openings JunTame
• 8/2 8:15am ADP National Employment ReportHot
• 8/3 10am ET July ISM ServicesTame
• 8/4 8:30am ET July Jobs reportTame
• 8/7 11am ET Manheim Used Vehicle Index July FinalTame
• 8/10 8:30am ET July CPITame
• 8/11 8:30am ET July PPITame
• 8/11 10am ET U. Mich. July prelim 1-yr inflation Tame
• 8/11 Atlanta Fed Wage Tracker JulyTame
• 8/15 8:30am ET Aug Empire Manufacturing SurveyMixed 
• 8/15 10am ET Aug NAHB Housing Market IndexTame
• 8/16 8:30am ET Aug New York Fed Business Activity SurveyNeutral
• 8/16 2pm ET FOMC MinutesMixed 
• 8/17 8:30am ET Aug Philly Fed Business Outlook SurveyPositive
• 8/17 Manheim Aug Mid-Month Used Vehicle Value IndexTame
• 8/23 9:45am ET S&P Global PMI Aug PrelimWeak
• 8/25 10am ET Aug Final U Mich 1-yr inflationMixed
• 8/28 10:30am ET Dallas Fed Aug Manufacturing Activity SurveyTame
• 8/29 9am ET June S&P CoreLogic CS home priceTame
• 8/29 10am ET Aug Conference Board Consumer ConfidenceTame
• 8/29 10 am ET Jul JOLTSTame
• 8/31 8:30am ET July PCETame
• 9/1 8:30am ET August NFP jobs report
• 9/1 10am ET August ISM Manufacturing

Key incoming data July

• 7/3 10am ET June ISM ManufacturingTame
• 7/6 8:15am ADP National Employment Report Hot
• 7/6 10am ET June ISM ServicesTame
• 7/6 10 am ET May JOLTSTame
• 7/7 8:30am ET June Jobs reportMixed
• 7/10 11am ET Manheim Used Vehicle Index June FinalTame
• 7/12 8:30am ET June CPITame
• 7/13 8:30am ET June PPITame
• 7/13 Atlanta Fed Wage Tracker JuneTame
• 7/14 10am ET U. Mich. June prelim 1-yr inflationMixed
• 7/17 8:30am July Empire Manufacturing Survey
• 7/18 8:30am July New York Fed Business Activity Survey
• 7/18 10am July NAHB Housing Market Indexin-line
• 7/18 Manheim July Mid-Month Used Vehicle Value IndexTame
• 7/25 9am ET May S&P CoreLogic CS home priceTame
• 7/25 10am ET July Conference Board Consumer ConfidenceTame
• 7/26 2pm ET July FOMC rates decisionTame
• 7/28 8:30am ET June PCE Tame
• 7/28 8:30am ET 2Q ECI Employment Cost Index Tame
• 7/28 10am ET July Final U Mich 1-yr inflation Tame

Key data from June

• 6/1 10am ET May ISM ManufacturingTame
• 6/2 8:30am ET May Jobs reportTame
• 6/5 10am ET May ISM ServicesTame
• 6/7 Manheim Used Vehicle Value Index MayTame
• 6/9 Atlanta Fed Wage Tracker AprilTame
• 6/13 8:30am ET May CPITame
• 6/14 8:30am ET May PPITame
• 6/14 2pm ET April FOMC rates decisionTame
• 6/16 10am ET U. Mich. May prelim 1-yr inflationTame
• 6/27 9am ET April S&P CoreLogic CS home priceTame
• 6/27 10am ET June Conference Board Consumer ConfidenceTame
• 6/30 8:30am ET May PCETame
• 6/30 10am ET June Final U Mich 1-yr inflationTame

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up)Positive inflection
• 5/2 10am ET Mar JOLTSSofter than consensus
• 5/3 10am ET April ISM ServicesTame
• 5/3 2pm Fed May FOMC rates decisionDovish
• 5/5 8:30am ET April Jobs reportTame
• 5/5 Manheim Used Vehicle Value Index AprilTame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion SurveyBetter than feared
• 5/10 8:30am ET April CPITame
• 5/11 8:30am ET April PPITame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutesDovish
• 5/26 8:30am ET PCE April Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

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35 Granny Shot Ideas: We performed our quarterly rebalance on 7/18. Full stock list here –> Click here

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