"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.