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Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

Equities were left a flaming wreck after Jackson Hole (see chart below), with S&P 500 falling ~7% in the ensuing two weeks. But have since managed to stage a bounce in the last few days.

Flaming Elmo GIFs | Tenor
Source: GIF.com

Fortunately, the technical damage could be limited, if stocks manage to sustain a bounce from here. As shown below, using “simple trendlines,” we can see that both:

  • S&P 500 and NASDAQ Composite both respected the trendline in place
  • since June 2022
  • in our view, June 17, 2022 was the date of fundamental capitulation
  • as that was the date inflationary pressures reached “maximum upside acceleration” on the heels of a strong May CPI, plus negative U Mich consumer inflation survey, plus Fed decided to move to +75bp hike
  • and this recent pullback touched that corresponding trendline
Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

In fact, taking a further step back, stocks have seemed to find footing along the trendline connecting the March 2020 lows and June 2022 lows. Thus, even as challenging as the last few weeks have felt, one could suggest the uptrend/bull market remains solidly intact.

Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

Even with bad September seasonals, a roadmap exists for positive catalysts into month-end

The August CPI released on 9/13 is particularly important for markets. And it looks like the inflation-swaps and bond markets are expecting outright deflation. We have highlighted this multiple times.

  • deflation month-over-month of -0.2% (August)
  • 12m inflation forwards are now 1.7% down from 6% in June 2022
  • wow, inflation expectations are tanking
  • at a time when Fed officials are still talking tough on inflation
  • we think this remains a setup where downside reads in inflation means Fed has less work to do
Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

September is seasonally the worst month of the year, and this is particularly true during mid-term election years, as discussed many times by Mark Newton, Head of Technical Strategy for Fundstrat. That has added to the pessimism about equities in general, and there are some positive events on the horizon:

  • yesterday, AAII (American Association of Individual Investors) retail sentiment was released and was extreme bearish reading of -35 (% bulls less % bears) and mirrors the -38% reading on June 10th
  • this is a contrarian signal and extreme bearish readings bode for equity upside
  • on 9/13, August CPI is released and we expect CPI month-over-month to show inflation barely increased in the month. In fact, CPI month-over-month for the next 5 months expected to show sharp slowing
  • August CPI mom: -0.2%
  • Sept CPI mom: -0.1%
  • Oct CPI mom: +0.0%
  • Nov CPI mom: +0.0%
  • even leading indicators for core services inflation like housing are rolling over visibly
  • today, Redfin noted that San Francisco home prices fell 7% YoY, a sizable decline
  • and surely suggesting OER (owners’ equivalent rent) is set to similarly cool
  • On 9/14, Sept PPI released and as we noted, the plunge in ISM prices paid portends lower PPI
  • Gasoline is already 25% off its peak and with oil declining to low-$80s, gasoline is set to ease further
  • On 9/16, U Mich Consumer survey released and possibility for lower inflation expectations = key for Fed
  • On 9/21, September FOMC and this could be another “sell the news, buy the event”

In other words, over the course of this month, the incoming cadence of data could support the notion that the inflationary pressures in the US are past the peak. And perhaps more importantly, could be falling quickly.

Additonally, there may be a few incremental development supportive of equities:

  • the 10-year interest rate is possibly stalling at 3.32%, not yet managing to match the 3.5% high on 6/14
  • our Head of Technical Strategy, Mark Newton, believes yields could be peaking soon
  • similarly, the dollar index  DXY rallied 15% YTD and Newton also expects USD to be reaching a level where other currencies could start to rally (EUR oversold, etc)
  • falling yields and falling USD, in our view
  • would be supportive of further gains

Combined with the above incoming economic data and these could be supportive of equities building on strength in September.

August ISMs show “% reporting lower prices” is ABOVE long-term average = PPI set to fall

Trends in pricing were surprisingly positive in the August ISMs, both manufacturing (9/1) and services (9/6). Take a look at the specific question:

  • % reporting “lower” prices paid
  • August ISM manufacturing: 26.7%
    (average since 1948: 10.5%)
  • August ISM services: 8.1%
    (average since 1997: 7.9%)
  • those reporting “lower prices paid” is actually ABOVE long-term average
  • again, above long-term average
  • this tells us pricing pressures are improving rapidly
Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

And as we highlighted a few weeks ago, we believe this bodes well for PPI to decline sharply in coming months. As the chart below illustrates, ISM prices paid leads PPI by several months.

Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

In case you are wondering, there are visible improvements in those responding “higher prices paid” and both are well off their peaks.

  • in fact, for manufacturing, this is back to BELOW long-term average
Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

HOUSING: Falling home price is overall positive as this will cool shelter inflation

Housing data continues to point to weakening prices as higher interest rates dramatically impact affordability. While there is a concern that a downturn in home prices could lead to a recession, the more important influence, in our view, is weakening home prices cools inflationary pressures:

  • RedFin shows today that home prices in San Francisco are down 7% YoY, an outright decline
Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities
Source: Bloomberg

And this is not entirely surprising given affordability nationwide is impacted by higher interest rates. The NAR Housing Affordability Index is at an all-time low.

Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

But as Goldman Sachs notes, the combined impact of all these factors is shelter inflation is set to slow. Shelter is 33% of the CPI basket, so a slowing here goes a long way towards reducing overall inflationary pressures.

Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

And their shelter inflation tracker, tracking alternative rent measures, already looks like it has peaked. In fact, two of these components, Zillow and Apartment list show the drop in month-over-month changes are falling like a rock.

Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

JOB OPENINGS: Latest Indeed Labs data shows openings fall to lowest level in 2022

The latest indeed.com data shows job openings have fallen to the lowest levels in 2022.

  • and based on the regression by our data science team, led by tireless Ken
  • suggest JOLTS likely shows a sizable downside read for August JOLTS
Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

JOBS: Employment gains in past 5 months primarily driven by part-time workers

But this weakening in job openings does fit with what appears to be more meaningful weakness in labor markets. Take a look at the comparision between the BLS establishment survey (payroll figures) versus household survey (used to calculate unemployment rate):

  • for the last 5 months
  • NFP shows +1.888 million jobs added
  • Household survey shows only +274k jobs
  • Household survey implies only 50k-55k jobs added each month
  • hardly a barn burner employment market
Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

In fact, looking at the types of employment below:

  • in past 5 months, per household survey
  • full-time employment is down -383k
  • part-time employment is +335k
  • multiple job holders (in both of above) +377k
Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

STRATEGY: 2H rally view intact

Given the list of market worries above, the natural question is how is there a positive thesis on equities into 2H2022? Here is our take:

  • our continuing analysis shows leading indicators point to disinflationary/deflation
  • US corporates remain impressively resilient, enduring the pandemic global shutdown with cost discipline
  • and US corporates are weathering the inflation surge impressively as well
  • the US economy has managed to absorb rapid Fed rate hikes so far
  • and US economic relative positioning far stronger in 2022
  • US net beneficiary of higher energy prices, absolute and relative (US exports oil)
  • US is on-shoring assets = future competitive advantage
  • US has labor issues, but this will be solved by either automation or rise in workforce participation
  • investor sentiment is rock bottom and worse than GFC by some metrics
  • fixed income markets show far less inflation in swaps, etc
  • and while many believe “bonds are getting it wrong” including Fed officials
  • the drop in energy and housing and other indicators are supportive of this lower inflation outlook
  • hence, Fed could do far less tightening as the market is doing Fed’s work

Bottom line. We see 2H rally thesis intact.

STRATEGY: 2022 Bear market was 164 days, or 25% duration of prior bull

Our data science team put together the comparative duration of bull markets and bear markets, and the corresponding ratio:

  • since 1942, there have been 14 such cycles
  • median ratio of bear vs bull is 31%, meaning a bear market is roughly 1/3 duration
  • since 1982, this ratio is only 15%
  • in 2022, the preceding bull market was 651 days
  • the current bear market was 164 (using 6/16)
  • or 25% ratio
Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

As seen below, this ratio is solidly within the ranges seen since 1982.

  • many investors think “more time” is needed for this bear market
  • but given the shortness of the preceding bull market 651 days versus 1,309 median
  • the corresponding bear market should also be shorter
Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

BUY THE DIP REGIME: Stocks already saw fundamental capitulation

And we want to revisit the chart below, which looks at the internals of the S&P 500 — the % stocks >20% off their highs, aka % stocks in a bear market.

  • this figure surged to 73% on 6/17
  • this was only exceeded 3 times in the past 30 years
  • each of the 3 prior instances was the market bottom
  • we think this is the 4th instance
Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

BUY THE DIP: forward returns strong

And stocks have the best forward returns when this figure exceeds 54% as shown below:

  • in 3M, 6M and 12M
  • the best decile for returns
  • is when this figure is oversold >54%
  • hence, buy the dip regime is in force
Despite negative September seasonals, roadmap shows positive catalysts in next few weeks + peaking USD + peaking yields = supportive equities

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