As September Begins With Pain, Seasonal Weakness Could Be Front Loaded
Our Views
- We expected stocks to rebound on Friday’s jobs report, and though we are disappointed that they did not, this does not mean that they will not rebound next week.
- That said, it is starting to look to me that we are “front loading” this seasonal weakness.
- Even though caution is warranted for the next eight weeks into election day, we see no fundamental reason for stocks to have traded so poorly the first trading week of September. Keep in mind the Fed is dovish, and there is a focus on keeping labor markets strong. Furthermore, all this is happening in the context of a very strong stock market in 2024, one in which the S&P 500 has gained in seven of the last eight months.
- Bottom line: We would not be sellers here. Though we urge caution over the near term, we see more upside than downside for stocks.
- The post-holiday selling in US Equities during this shortened week seems to be shaking the confidence of many investors despite the lack of any material decline for the stock market.
- As discussed last week, five sectors recently rose to make new all-time high monthly closes, and despite Technology waning a bit, there hasn’t been any material breakdown technically.
- I’m still inclined to expect a possible SPX rally back to new highs and don’t feel that this week’s slump represents any major selloff. Only if 5383 is broken would I begin to harbor worries about a larger correction. I’m skeptical at this time that this early weak consolidation leads to any real broad-based market weakness.
- Hard Landing Pricing: Weak economic data has shifted the crypto market toward hard landing expectations, increasing short-term risks for crypto but raising the likelihood of Fed rate cuts and cessation of QT.
- Bitcoin vs. Real Yields: Bitcoin has decoupled from falling real yields, while gold has held up better, signaling either a lagging BTC rally or the start of broader risk-off moves.
- Bond Market Volatility Increasing: The MOVE index increased to nearly 120 again this week, posing a risk to market liquidity.
- Consumer Resilience: Despite mixed manufacturing data, the services sector and consumer strength remain encouraging, supporting a positive outlook for crypto heading into Q4.
- PMI Accumulation Zone: Historically, weak PMI data correlates with strong forward Bitcoin returns.
- Core Strategy – We remain optimistic about the outlook for crypto as we approach year-end, viewing a market leaning toward a soft landing as constructive for prices. However, given the near-term risks highlighted in this week’s note, along with ongoing negative seasonality, we are raising additional cash in our Core Strategy by reducing relative allocations to ETH and SOL. Our focus remains on the majors, with selective exposure to altcoins like HNT, MKR, and STX. As a reminder, our Core Strategy allocation model is included at the end of each note, along with our crypto equity baskets and trade recommendations.
- Next week will be a big week for both Presidential campaigns, with former President Trump and Vice President Harris scheduled to meet in their first debate on Tuesday (September 10).
- The debate will likely serve as Harris’s introduction to many Americans in a truly Presidential context, and she will need to balance attacks on her rival with a defense of the Biden administration’s record.
- Trump will also face challenges, as he strives to attack the Biden/Harris record while trying to refrain from personal attacks that are seen by many as counterproductive to his campaign objectives.
- Congress returns to work next week as well, seeking to pass a Continuing Resolution to prevent a federal government shutdown on September 30.
Wall Street Debrief — Weekly Roundup
"One must try, everyday, to expand one's limits." ~ Mas Oyama
Good evening,
Stocks just notched the fifth-worst start to September since 1928, and the worst week in a year and a half. This included a sharp drop for the S&P 500 on Friday despite the August jobs report showing a labor market that is "an ideal, middle-of-the-road" range, as Fundstrat Head of Research Tom Lee put it.
The report showed 142,000 jobs created in August – lower than the 165,000 expected by consensus, but still an improvement on July’s numbers. Unemployment fell to 4.2% from 4.3% the month prior, in line with expectations. The number of industries adding jobs in August rose to 53% – the highest level since May.
To Lee, those numbers were not so hot as to cause the Federal Reserve to further delay rate cuts, yet not so low as to suggest an imminent recession or hard landing. "We expected stocks to rebound on today’s report," he admitted, "and while we are disappointed this did not happen, this does not preclude a rebound next week. There is arguably a paucity of fundamental reasons for this week's disappointing market movements." In Lee’s opinion, "investors have gotten overly gloomy."
Head of Technical Strategy Mark Newton did not disagree completely. On Friday, he acknowledged that "fear is creeping back into markets," citing a climbing equity put/call ratio. "The ratio is now nearing 1. That would put us on course to close at the highest levels of the year on a weekly basis," he observed. Like Lee, he feels the gloom might not be justified. "Looking at the market, we can see hiring is almost at a standstill, yet we're not really seeing layoffs. To me, that's the real key. We're not seeing broad unemployment."
He had this to say about this week's slump: "Based on my work, I see all of this as Technology-related – Tech and Energy. In the last week, we've seen great movement out of Financials and Healthcare. We had five sectors that moved to new monthly all-time highs as of the end of August. I think that's very, very good. This is a market where many different parts are doing very, very well."
Newton moved on to a discussion of market expectations as to the Fed's rate-cut timetable. As implied by Fed Funds futures trading, "we're showing 36 basis points of cuts in September – basically a split between expectations for a 25 bp cut or a 50 bp cut. But if we look further out, the market anticipates roughly 200 basis points of cuts by next June, expecting the Fed to start taking rates down quite sharply."
He asked rhetorically, "So would you want to see a 50 bp cut at the next FOMC meeting? That arguably would mean the Fed knows something that we all don't, because that's a very big cut in an election year."
Lee is in agreement that a 50 bp cut from the Fed later in the month might not necessarily be a good thing for investors. "It depends on how the market interprets it. There are potential dovish and hawkish interpretations for both a 25 bp cut and a 50 bp cut," he said. Notably, the odds of a 50 bp cut plunged from 65% to 27% on Friday after the jobs report – one possible reason why stocks also fell on Friday. This is shown in our Chart of the Week.
Sector Allocation Strategy
These are the latest strategic sector ratings from Head of Research Tom Lee and Head of Technical Strategy Mark Newton – part of the September 2024 update to the FSI Sector Allocation Strategy. FS Insight Macro and Pro subscribers can click here for ETF recommendations, precise guidance on strategic and tactical weightings, detailed commentary, and methodology.
Elsewhere
Vice President Kamala Harris announced her opposition to Nippon Steel’s bid to acquire U.S. Steel, making the proposed takeover at least one issue in which she shares common ground with her Republican opponent, former President Donald Trump. President Biden has also expressed opposition to the proposal, as has the United Steelworkers union. U.S. Steel has said that it will be forced to shut down multiple steel mills if the deal fails.
Federal law-enforcement agents raided the homes of top New York City officials, likely as part of a corruption investigation. Among those targeted were Police Commissioner Edward Caban, First Deputy Mayor Sheena Wright, and Deputy Mayor for Public Safety Philip Banks III.
An in-flight engine fire on an Airbus A350-1000 operated by Cathay Pacific has resulted in the European Union Aviation Safety Agency (EASA) ordering inspections of all planes of that model in the regulator's jurisdiction. There were no injuries in the Cathay Pacific incident.
The State, Justice, and Treasury Departments moved against Russian state media executives, filing charges and accusing them of engaging in a broad “nefarious” campaign to interfere with the upcoming U.S. elections. Federal authorities alleged that RT was central to the Kremlin’s efforts to “advance covert Russian influence actions.”
French President Emmanuel Macron has named Michel Barnier, 73, as the country’s next prime minister. Barnier, nicknamed "Monsieur Brexit" due to his past service as the EU’s chief negotiator for Brexit, is a veteran of the right-wing Les Républicains party.
Former Volkswagen CEO Martin Winterkorn went on trial to face fraud and market-manipulation charges connected with the automaker’s use of rigged software to manipulate diesel-emissions tests. Prosecutors in Frankfurt allege that Winterkorn knew about the improprieties by May 2014 and allowed them to continue until they were discovered by the U.S Environmental Protection Agency in September 2015.
The owner of the 7-Eleven convenience-store chain has rejected Couche-Tard's buyout proposal, stating that the $38 billion offer is "grossly" undervalued. Seven & i Holdings told the Canadian owner of Circle K stores that it remained open to negotiations, however.
The former head of Lebanon’s central bank was detained in connection with several corruption cases. Riad Salameh headed the country’s central bank from 1993 to 2023. During his tenure he faced multiple allegations of corruption and embezzlement, all of which he has denied. The U.S., U.K., and Canadian governments have all sanctioned Salameh for alleged corruption, while France has issued an international warrant for his arrest via Interpol.
And finally: scientists at Australia’s Murdoch Children’s Research Institute have created lab-grown blood stem cells using regular cells for the first time – a breakthrough with significant potential implications for the treatment for certain types of blood cancers. Regular mouse cells were used to create stem cells that, when infused back into the mice, became blood-making bone marrow cells. Current treatment for diseases such as leukemia often kill off patients’ existing bone-marrow cells, requiring transplants of stem cells harvested from umbilical cords, but such cells are prone to rejection and often unavailable. Researchers caution that it could be five years before clinical trials on humans are ready to begin.
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