Evidence growing that equities made their summer lows on 8/5. Weekly claims strengthen case weak July jobs was due to Hurricane Beryl. July CPI next week matters.

VIDEO: The un-inversion of the VIX term structure continues and supports the notion that the worst is behind us.  Since 1928, the most common month for Aug to Oct bottoms is August, 44% of the time

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We are now day 3 post “Tokyo Black Monday” and equity markets managed their best close this week with S&P 500, Nasdaq 100 and Russell 2000 gaining +2.3%, 3.1% and 2.4%, respectively. Our base case remains the carnage from last week as largely a “growth scare” rather than the start of a “bear market/recession.” And as we noted earlier this week, evidence continues to mount the worst is behind us.

• The July jobs report (released last Friday) triggered an avalanche of global panic, which spilled over to Monday leading to Tokyo Black Monday. The most prominent evidence of the panic was the spot VIX surging to 66 on Monday, the 3rd highest ever reading and only surpassed by GFC and the 2020 pandemic panic.
• The positive equity market reaction to this week’s surprisingly low jobless claims (233k vs Street 240k and vs 250k last week) is the strongest evidence the “growth scare” is a primary culprit in 3 days of equity carnage. A low jobless claims blunts the notion that the US labor market is caught in contractionary dynamic.
• There was controversy in the July jobs report (see our report on Friday) as many economists suggest the surprisingly weak report was due in part to the disruption from Hurricane Beryl on the Texas economy. The hurricane knocked out power for 1.3 million homes for several weeks. The BLS said there was no discernible impact from the hurricane, yet, jobless claims surged in Texas in July.
• This week, Texas state level weekly claims fell -4,814 to 20,264 from 25,078 week prior. These are not seasonally adjusted, but only 3 states had a drop in claims >1,000
  – Michigan -7,401 <– Auto plant retooling
  – Texas -4,841 <– post-Hurricane
  – Missouri -3,834 <– UAW plant strike
• And as we noted last week, weekly claims ex-TX were steady in July versus overall weekly claims rising. And this week, those weekly claims ex-TX continue to be stable. So, this paints a picture of a steadier labor market than implied by that July jobs shortfall (+114k vs Street +179k).
• Next week is July Core CPI released on Wednesday Aug 14th at 8:30am ET. The Street is looking for a tame +0.19% MoM:
  – the last 3 Core CPI reports were very “soft” on inflation
  – April +0.29%
  – May +0.16%
  – June +0.09%
  – July +0.19% would be a 4th VERY GOOD
• Thus, next week could serve as another fundamental catalyst. Good inflation data is good news. This strengthens the case for the Fed to embark upon a rate cutting cycle. Bill Dudley (former NY Fed) and Claudia Sahm (former Fed) have this week urged the Fed to cut.
• And with labor markets holding up (per weekly claims), the Fed is not cutting into a downturn, but is cutting rates because “real interest rates” (Fed funds less inflation) is simply too high.
• Ultimately, the most important positive of the past week, we believe, is the Fed is likely to shift away from its coda of “data dependence” and will begin to be “forward looking.” In fact, this is the exact words used by Austan Goolsbee, Chicago Fed President, in his comments to CNBC on Monday morning.
• We believe this is further evidence the “worst is behind us” and that downside risks are limited. But at the same time, we know we are in August.
  – since 1950, when S&P 500 is up >10% in 1H
  – August win-ratio is only 39%
  – median loss is -0.6%
  – so a bad month
• Another case to suggest a bottom is likely in for August to Sept is the weak sentiment. Investor conviction in this bounce is very weak. I did multiple client zooms this week (including one with >2,000 investors tuned in). On the margin, the sharp 3-day decline of 8% rattled the confidence of many institutional investors. And even today, our conversations revealed investors are now leaning cautious/bearish given the poor price action and mounting concerns of a recession.

BOTTOM LINE: Evidence growing that equities made their summer lows on 8/5.

Generally, August to October is a tough period for markets. One important client, ES of NY, has repeatedly mentioned to me “I never make money in August.” And that is consistent with Mark Newton, Head of Technical Strategy, view that Aug to Oct is window where stocks risk/reward is less attractive than the period post-election.

• Since 1950, however, of that period between August to October, the S&P 500 has bottomed most commonly during August.
  – August, Sept and Oct low %: 44%, 17%, 40%
  – meaning, markets most likely bottom in August (for that period)
• Guess what is the most common week for the bottom?
  – the first week of August
  – 15 of the 74 years
• Lastly, we need to be mindful that Iran could launch an attack this week, in response to several high profile assassinations. The Olympics continue to August 11. So, markets are naturally wary of the headline risk from this. But we know the adage:
  – “sell the build-up, buy the invasion”
• The only thing is that at the start of the Russia-Ukraine war, markets had a short relief rally. But that war has since become a larger and most costly conflict. So, problems perculating in the Middle East are not to be taken lightly.

• But just because markets might have some headwinds near term does not change the probabilities of a strong second half. As we noted previously:
  – Since 1950, when S&P 500 is up >10% in the first half
  – 23 instances
  – 2H (second half) gains +9.8%, 83% win-ratio
  – the 4 negative 2H instances were 1975, 1983, 1986, 1987
  – essentially, all the negative 2H were during Volcker era

Bottom line, markets are certainly showing strong signs of gaining their footing. And we also view this panic as ultimately being a growth scare (coupled with a carry trade unwind).

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Key incoming data August 2024:

• 8/1 8:30 AM ET: 2Q P Nonfarm Productivity Tame
• 8/1 8:30 AM ET: 2Q P Unit Labor Costs Tame
• 8/1 9:45 AM ET: Jul F S&P Global Manufacturing PMI Tame
• 8/1 10:00 AM ET: Jul ISM Manufacturing PMI Tame
• 8/2 8:30 AM ET: Jul Jobs Report Tame
• 8/2 10:00 AM ET: Jun F Durable Goods Orders Tame
• 8/5 9:45 AM ET: Jul F S&P Global Services PMI Tame
• 8/5 10:00 AM ET: Jul ISM Services PMI Tame
• 8/6 8:30 AM ET: Jun Trade Balance Tame
• 8/7 9:00 AM ET: Jul F Manheim Used vehicle Index Mixed
• 8/12 11:00 AM ET: Jul NY Fed 1yr Inf Exp
• 8/13 6:00 AM ET: Jul Small Business Optimism Survey
• 8/13 8:30 AM ET: Jul PPI
• 8/14 8:30 AM ET: Jul CPI
• 8/15 8:30 AM ET: Jul Retail Sales Data
• 8/15 8:30 AM ET: Aug Empire Manufacturing Survey
• 8/15 8:30 AM ET: Aug Philly Fed Business Outlook
• 8/15 10:00 AM ET: Aug NAHB Housing Market Index
• 8/15 4:00 PM ET: Jun Net TIC Flows
• 8/16 10:00 AM ET: Aug P U. Mich. Sentiment and Inflation Expectation
• 8/19 9:00 AM ET: Aug M Manheim Used vehicle index
• 8/21 2:00 PM ET: Jul FOMC Meeting Minutes
• 8/22 8:30 AM ET: Jul Chicago Fed Nat Activity Index
• 8/22 9:45 AM ET: Aug P S&P Global Manufacturing PMI
• 8/22 9:45 AM ET: Aug P S&P Global Services PMI
• 8/22 10:00 AM ET: Jul Existing Home Sales
• 8/23 10:00 AM ET: Jul New Home Sales
• 8/26 10:00 AM ET: Jul P Durable Goods Orders
• 8/26 10:30 AM ET: Aug Dallas Fed Manuf. Activity Survey
• 8/27 9:00 AM ET: Jun S&P CoreLogic CS home price
• 8/27 10:00 AM ET: Aug Conference Board Consumer Confidence
• 8/29 8:30 AM ET: 2Q S 2024 GDP
• 8/30 8:30 AM ET: Jul PCE Deflator
• 8/30 10:00 AM ET: Aug F U. Mich. Sentiment and Inflation Expectation

Economic Data Performance Tracker 2024:

Economic Data Performance Tracker 2023: