“In order to be big, you have to think big. If you think small, you're going to be small.” ~ Emeril Lagasse

Good evening:

The holiday-shortened trading week proved to be challenging, marking a poor start to the month. This was not entirely unexpected, given the historical seasonality challenges that typically confront investors in September. 

Head of Research Tom Lee also noted that, “We've had some data that's a little bit inflationary and on top of that, you know, people are kind of still trying to figure out if everything we're seeing is consistent with a soft landing or a hard landing.” 

“A lot of people are talking about the yield curve and how the curve is inverted,” he said. “But you know, since 1976, there have been 22 yield-curve inversions. And, of course, they've been five recessions. So that means the inversions have called a lot more recessions than have actually taken place,” he pointed out. “So I think maybe people are placing too much weight on the yield curve inversion as a signal for a recession, because it's actually less bulletproof than people realize.”

As Head of Technical Strategy Mark Newton noted, “This week, we’ve pulled back and given back right around 60% of the entire move up since mid August. But when I look at the broader S&P, you can see just such a lack of damage compared to what we've done since last October. Largely we've been in consolidation since late July. That's caused momentum to roll over a little bit on a weekly basis, but it is still positive on a monthly basis. It’s true we need to repair some of this damage but I'm not that concerned about the broader trend.” 

But heightened yields and volatility remain headwinds for a market. Lee and his team are watching VIX closely, conceding that there is a risk that VIX could surge and put near-term pressure on stocks. 

While yields also remain concerning, Newton said, “Actually I think yields are tiring. You can make the case that Treasuries are attractive at current levels. I think we're very close to a time when Treasuries are going to start to rally and yields will roll over sharply, and that should provide a cushion for the S&P – and for consumers overall.”

Newton elaborated on his overall technical view: “I do think we're close to a low, but it’s tough to say that we're actually there. Anything under 4410 would be a problem, technically. That would mean that we're going to not only retest but also break these August lows. I still think that the ultimate low probably does not get down under 4300. So I think that downside is still pretty muted. But we need to see bearish sentiment pick up and that really hasn't happened since August. Sentiment improved after this rally from late August and now it's pretty neutral.” 

Lee had a different view of sentiment, based on anecdotal conversations with clients. “To me, it’s clear investors are incrementally nervous. They are concerned that economic momentum has been improving at a pace that might warrant the Fed to have to increase the path of hikes.”

Lee and Newton also discussed a paper published by the Chicago Fed this week that argued that many of the effects of this cycle’s series of rate hikes have yet to be seen, and that the current hikes might have already been enough to bring inflation back on target. “I think it's kind of being repeated by FOMC officials – I think there is now more belief that they should be patient. And so I think the November pause is much more probable than the market believes – right now they’re putting the odds of a November hike at nearly 50-50,” Lee said.

Newton agreed, but he also repeated a view he’d expressed in previous huddles: “I think largely we've reached the end game for Fed tightening. And so regardless of whether they hike another 25 or not, it’s really not a big deal, in my view.”

Instead, it was “what happened with Technology in the last week that has made me really optimistic looking further out,” he said. “Look, I know the narrative is that we're seeing this big Tech wreck, but I think it's been exactly the opposite. If you look at Technology on equal weighted terms, it's actually the second-best performing sector.”

“Tech has been great and it’s going to be tough to see why the market would go down if Tech breaks multi year highs on equal-weighted terms and that's what I'm actually expecting in the months ahead, even if it doesn't happen right away.” 

Lee’s view for the rest of the month and year remained bullish, if slightly subdued in the nearer term. “Next week we get CPI numbers, and we expect core CPI to come in at +0.20% MoM or so, representing three consecutive months of exceptionally low core CPI. And looking into October, I think earnings are coming better and so earnings revisions have been looking positive. In fact, the upturn in S&P 500 profit estimates is a strong argument the US economy is slipping into an expansion,” he said. This can be seen in our Chart of the Week.

On Apple (AAPL -0.43% )

News outlets reported that Chinese officials have expanded previous bans on workplace use of iPhones at government agencies and at state-owned enterprises. The precise scope of the ban could not be independently confirmed but nevertheless had an immediate effect on the value of Apple’s market cap: AAPL -0.43%  closed fell almost 3% on Thursday and closed the week down 5.95%. 

There was some discussion at our weekly huddle about whether this would have a material impact on Apple’s results or its sales in China. Apple’s iPhones do not enjoy the same market-share dominance in China that they do in many other countries, and some suggested that even before this week’s news, such policies were not uncommon. 

Nevertheless, the impact on Apple’s share price was undeniable and important for all equity investors: As Newton put it: “Bottom line is this is obviously a very important stock and company for the S&P and for the QQQs. So it's like, what, 6% or 7% of the [S&P500] and more than 11% of the Nasdaq. For Apple (AAPL -0.43% ), 172 is really an important level of support. And this coming Tuesday they're rolling out their new iPhone and normally that can be a catalyst for a decent move. So I do think this level holds which also means the market likely holds just given Apple’s influence within Technology.”

Elsewhere 

The Senate confirmed Dr. Philip Jefferson as vice chair of the Federal Reserve Board of Governors on a broadly bipartisan vote of 88-10. It also confirmed Dr. Adriana Kugler, a labor expert and World Bank economist, to the board, and approved a second term on the board for Dr. Lisa Cook.

The United Kingdom revised estimates of the size of its economy upward by 0.6%. The revision makes the British economy, if not great, at least better than Germany’s and roughly as strong as France’s.

Arm Holdings filed for its IPO on Tuesday as expected, valuing the British semiconductor design firm at between $48.2 billion and $52.3 billion. Among those likely to be interested in acquiring stakes in the company are Tech giants like Nvidia, Alphabet, and Apple. 

Japan reported Q2 economic growth of 4.8% annualized, falling short of earlier 6% estimates. Japanese growth was driven in part by exports, which climbed 13%, though private consumption fell. 

The EU has designated six big Tech firms as “gatekeepers” subject to stricter oversight. European officials argue that because the six companies – Alphabet, Amazon, Apple, ByteDance, Meta, and Microsoft – operate “core platforms,” they need to be subject to more regulation. Among them: heightened interoperability requirements and added user flexibility on apps. 

Huawei’s latest top-line smartphone, the Mate 60 Pro, is powered by a chip with advanced – if not cutting edge – 7nm technology, independent analysis confirms. The Kirin 9000s, made by Semiconductor Manufacturing International Corp (SMIC), demonstrates the country’s progress in easing reliance on advanced chipmaking technology to which U.S. allies have restricted Chinese access. In related news, South Korea’s SK Hynix said it would begin investigating how two of its memory chips also ended up becoming part of the Huawei Mate 60 Pro, despite U.S. export restrictions of such technology to Huawei.

Chevron employees at the company’s liquified natural gas facilities in Australia went on partial strike. Approximately 500 workers will engage in work stoppages until September 14, when a total strike is scheduled to begin if a deal is not reached before then.

And finally: With summer behind us, the United Nations World Meteorological Organization announced that the June to August season of 2023 was the warmest since recordkeeping began in 1940. 

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