We see this selloff as likely ending at or before Fed Chairs speech at Jackson Hole on 8/25

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We discuss: Why stocks risk/reward has shifted positively this week.  The key will be the direction of interest rates (10Y) but we see positive catalysts emerging at the end of this week with NVDA results and Fed Chair Powell’s speech at Jackson Hole.

Please click below to view today’s Macro Minute (Duration: 4:01).

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The S&P 500 is down -5% since the start of the month, and over the past week or two, new concerns have emerged in the market. Among these are the stalling growth in China and the surge in US 10-yr yields and to a very secondary extent, Fitch downgraded the USA sovereign rating. The fact that the McClellan Oscillator fell into severe oversold with a -50 reading shows this has been a high velocity decline, and coupled with above concerns, have emboldened the bears and skeptics.

Could this sell-off turn into a bigger rout? Maybe, but we think probabilities favor equities bottoming at or before Fed Chair Powell’s speech at Jackson Hole this coming Friday (8/25) at 10:05am.

• Over our many conversations with institutional investors in the past week, the vast majority cite the rise in interest rates as the most concerning for equities. This makes sense. The rise in interest rates means the P/E multiple comes under pressure. The 50bp rise in the US 10-yr to 4.255% is a 7% hit to P/E (thank TL of NC, CT for pointing this out) and this is about the hit to S&P 500. And higher multiple stocks would disproportionately get hit, which explains why FAANG/Tech have been hit harder with Nasdaq 100 down -7%.
• Has anything really explained why the 10-yr is up? Many of our macro clients are puzzled. After all, with softer inflationary pressures and a downside reading in China growth outlook, these should be a fundamental reason for interests to drift lower but other things could explain this:
  – BoJ announced tweaks to yield curve control = higher rates in USA as $$$ leaves USA
  – China supporting yuan means selling reserves = higher rates in USA
  – Even WSJ article Sunday from Nick Timiraos questioning neutral rate = higher rates?
  – growing US deficits per American Spectator (thanks RS of NC, CT)
• Is this just markets reflexively finding reasons to be worried, given the sell-off in August? In our view, yes. Foremost, keep in mind, this is August and markets tend to be less liquid and thinner. Moreover, August historically is a tricky month as we warned on July 31. And this is particularly true when equities are up >10% into August like we are in 2023.
• The iShares long-term ETF TLT saw -$1.8 billion in outflows in the past week. This is a staggering 5% of assets of TLT. Wow. I mean, that is a massive liquidation. The only time there was a greater outflow was 3/20/20 when there was a massive -$3.9 billion in outflows. Guess what? Didn’t that mark the bottom for stocks?
• There are two catalysts coming later this week. They are:
  – on 8/23 after close: Nvidia NVDA -0.48%  reports and likely to be strong
  – NVDA is selling as many chips as they produce and likely provide assurance about AI
  – on 8/25 at 10:05am ET: Fed Chair Powell speaks at Jackson Hole
• Why would Fed Chair Powell’s comments likely serve as a catalyst? We think the Fed is likely somewhat bothered by the rise in 10-year yields. This represents a meaningful tightening in financial conditions and threatens to push mortgage rates higher.
• In February of this year, the 10-year surged to 4.2% and this triggered a financial crisis among regional banks. And this 50bp surge in yields could trigger a financial problem somewhere. And the Fed in February made a dovish pivot at that time.
• We think the odds favor the Fed doing something similar at Jackson Hole. Moreover, as our Head of Technical Strategy, Mark Newton, has noted, it is possible Fed Chair Powell says something hawkish this coming Friday. But if he is hawkish and equity markets rise, this would actually be even more bullish.
• I think the Fed likely says something dovish-ish. Why? Does Fed want to risk another “something breaking” ala Feb 2023? While some look back at August 2022 when Fed Chair Powell’s statement was hawkish and marked the local top in 2022 (stocks fell -19% next 8 weeks), we think the context is the opposite.

Bottom line: We see this selloff as likely ending at or before Fed Chairs speech at Jackson Hole on 8/25

It is a relatively light week on data. There is the S&P PMIs but these are not as definitive as the ISM Manufacturing PMIs and also on Friday is the U Mich final August reading. Inflation expectations fell for mid-August, and we think the bias is downwards, even as gasoline has risen.

• We think risk/reward is now shifting favorably this week for stocks to rise
• The weakness of -5% month to date means August will likely be a down month
• The key for stocks to rally is a drop in US 10-yr yields.
• But our preliminary view is that September will be a solid month for stocks
• This would be counter to seasonals as many are calling for stocks to be weak in September

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 Prelim
• 8/25 10am ET Aug Final U Mich 1-yr inflation
• 8/28 10:30am ET Dallas Fed Aug Manufacturing Activity Survey
• 8/29 9am ET June S&P CoreLogic CS home price
• 8/29 10am ET Aug Conference Board Consumer Confidence
• 8/29 10 am ET Jul JOLTS
• 8/31 8:30am ET July PCE

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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