"And the wild things roared their terrible roars and gnashed their terrible teeth and rolled their terrible eyes and showed their terrible claws."
-- "Where The Wild Things Are" Maurice Sendak (1963)
The How and When
That was a tough week. The last trading day of the week was special. Trading volume was tremendous, as was expected. Everything that can expire, did expire this past Friday. As happens four times a year. The witches were out.
The S&P 500 closed below its 50-day simple moving average (SMA) on Friday. As did the Nasdaq Composite and the Nasdaq 100. As the Dow Transports had more than two weeks ago. As the Philadelphia semiconductor had back in mid-August.
The small-cap indexes? The Russell 2000 not only surrendered its 50-day SMA a couple of weeks ago. but fought a daily battle last week to hold on to its 200-day line, a line its cousin, the S&P 600, hasn't even touched since September 6. Late-cycle trading activity? Some might say.
Corporate margins now fight the same losing battle now fought by corporate earnings for the past nine months. Inflation is slowing, so they say, as crude oil and gasoline continue to rip the cover off of the ball, and suck the discretion out of discretionary spending. For the U.S. consumer. As both large and small businesses face uncertainty.
Goldilocks will save us. We are told. The porridge is just right. We're headed for a soft, no make that "no" landing at all. Even if we pretend that the U.S. did not already go through a six-month economic recession at the start of 2022 (which is what we did -- "pretend" -- because the public did not feel that one broadly). Still the size of the U.S. economy contracted for two straight quarters. We're out of the woods though. Aren't we?
Into the Woods
I was rather lucky. I know how to read a map and can navigate (on foot, alone) well using a compass, a pencil and protractor.
It came easy to me. Some kids have a lot of difficulty picking this stuff up. Sure, it's easy when there's a water tower in the distance, a church over there somewhere. A road or two is clearly visible. Any landmarks at all. Now do the desert. Or worse, try the rainforest. Shoot an azimuth in the jungle, and you might walk six or seven feet without having to move around an obstacle and reshoot that azimuth. Again and again. Each time increasing the likelihood of human error. Slight error here could mean half a mile there.
Know your stride. Count your steps. No GPS. Hasn't even been invented yet. You've got to know how far you've traveled and you've got to know that you're not walking in circles. Why? Because walking in a circle is a human tendency. Oh, and because, you'll die out there. You can't even call in a medivac or supporting fire if you don't know where the heck you are.
So, where the heck are we? You want to talk about lag effects? No? Too bad. Fact of life. The FOMC started raising rates about 17 months ago. The experts (academic economists with fancy degrees from fancy universities) say that the economy usually starts to run into real trouble about 18 months, up to 24 months after the Fed starts tightening monetary policy. Using that quasi-rule as guidance, if we had already gone into overt economic contraction, it would have been early.
How long has the yield for the U.S. 10-Year Note been inverted versus the yield of the U.S. 2-Year Note and held that inversion?
The chart, above, says that this inversion has now held since July 2022. That's 14 months, gang. Those experts mentioned above say that the average lag between sustained inversion and recession (since 1978) is about 15 months, but can take as much as 22 months. Again, living by this metric, if we had already gone into recession, we would have been early. Catching on yet?
So, Where Were We?
-- China's economy is back on track (No, it certainly is not).
-- The UAW is not out on strike (Oh boy. They sure are and they are asking for wages and benefits that will likely put their members out of work while bankrupting their members' employers in five to 10 years.)
Now Hear This
For the past week, the S&P 500 gave back just 0.16%, after a loss of 1.22% on Friday, which flipped the entire week on its ear. The S&P 500 closed last week up 15.91% year to date.
The Nasdaq Composite was hit for a loss of 0.39% over the past five business days, after getting slapped around for a loss of 1.56% on Friday. This puts the Nasdaq Composite up 30.97% for 2023.
The higher tech, more narrowly focused Nasdaq 100 closed down 1.75% last week. The Nasdaq 100 is up a still (but less) impressive 38.96% year to date.
The Philadelphia Semiconductor Index was our leader last week, but in the wrong direction. That index gave up 2.51% over the past week. after losing 3.01% on Friday. The "SOX" now stands up 37.29% for the year, which is down from being up 40.83% a week ago.
That leaves us with the Russell 2000. The small-cap index gave up 1.05% on Friday, but just 0.24% for the week. The Russell 2000 now stands up 4.87% for 2023.
Other equity indexes of note that actually closed in the green for the past week, even if just by a smidge, were the KBW Bank Index (+2.39%), the Dow Transports (+0.86%) and the S&P SmallCap 600 (+0.08%).
All 11 S&P sector-select SPDR ETFs shaded red this past multiple expirations Friday. However, seven of these sector funds shaded green for the week. For the week, the Utilities (XLU) easily led the way at +2.79%, with the Discretionaries (XLY) and the Financials (XLF) both gaining more than 1%. Technology (XLK) was the big loser for the week at -2.25%.
The Week Ahead
Key to this week, beyond anything else, will easily be what the Fed does, says and implies this Wednesday. Keep in mind that both the Bank of England and the Bank of Japan will hold policy meetings this Thursday. They, too, have the ability to shift currency valuations, that then impact commodity as well as large-cap multinational large-cap equity prices.
The Fed's media "blackout period" comes to an end this week with the September 20 (Wednesday) policy decision that comes along with the Fed's quarterly economic projections and the semi-ridiculous dot plot.
The FOMC is going to have to regain some flexibility that has been priced out of the marketplace. The last thing the Fed needs is to surprise the markets with a raise in rates on November 1 or December 13. So, either in the official statement, in the economic projections/dot plot, or in the press conference (probably all three), the Fed is going to have to leave you thinking that this is a "hawkish" skip, even if they have to scare you to do so.
As Sunday night slowly melts into Monday morning, I see that market pricing in a 99% probability for no rate change on September 20, and a 58% likelihood that the FOMC is done raising rates for this cycle. These markets are also pricing in a 53% probability that the Fed starts cutting rates by June 12, which would be the first of just three short-term rate cuts (down from four this time last week) in 2024.
Away from that Fed decision this Wednesday, the week will be less active than we experienced last week. That said, there will be enough important macro to keep traders and investors occupied.
Tuesday brings August Housing Starts and Building Permits along with an auction of $13B worth of U.S. 20-Year Bonds. On Thursday, the Philadelphia Fed will publish their regional manufacturing survey, which just happens to be the most closely followed regional manufacturing survey in the country. We'll also see Existing Home sales for August and the Conference Board's Index of leading Indicators, also for August. This Friday, S&P Global will hit us with their flash PMIs for both the manufacturing and service sides of the economy on the national level.
The Detroit Auto Show began last week and will continue through this week even as the UAW strikes against Ford Motor (F) , General Motors (GM) and Stellantis (STLA) . The show includes more electric vehicles than ever, which is ironic as this dispute between management and labor almost certainly forces EV-related plans for 2023 to be pushed out into 2024, at a minimum.
Microsoft (MSFT) will hold a special one-day event this Thursday in New York City to feature upcoming hardware products as well as updates on the firm's latest innovations in the burgeoning field of generative artificial intelligence.
This will be an extraordinarily light earnings week, the lightest in quite some time. Still, there will be a few well-known names that are ready to step to the plate. We'll hear from AutoZone (AZO) on Tuesday, followed by General Mills (GIS) and FedEx (FDX) on Wednesday. Darden Restaurants (DRI) will wrap up the week from an earnings-based perspective on Thursday morning.
Economics (All Times Eastern)
10:00 - NAHB Housing Market Index (Sep): Expecting 50, Last 50.
16:00 - BNet Long-Term TIC Flows (Jul): Last $195.9B.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (SFIX) (-0.21)