Is anybody out there besides me working this week?

The market continued to shrug off its early-August angst, with the S&P in reach of the all-time highs set in July. Something new, defensives have been strong - REITs, Utilities, Consumer Staples and Health Care are breaking out. A bear could call this a sign of trouble while a bull would welcome it as increased breadth. The bullish interpretation is strengthened by the fact that three-fourths of S&P 500 stocks are above their 200-day moving averages and three-fifths have been so all year. In both 2000 and 2007, breadth narrowed well before the top was reached, so this is reassuring. Election year dynamics mean the Biden (remember him?) administration will do all it can to support Kamala Harris’ chances of winning in November, and further stimulus is on the way. This, together with an easing Fed is, as Strategas research says, tough to bet against. Seasonally, however, we are heading into the year’s worst two months historically, the September and early October stretch where the market often struggles. An analysis of the last 40 years of the S&P 500 shows that, on average, the damage is done in September but it isn’t until late October that the rally begins in earnest. And yet it’s been so quiet – just 10 billion shares changed hands on Wednesday, the least in six weeks. Is anybody out there?

Yes, the S&P 500 is near its mid-July highs, but the investing climate has changed. Volatility disappeared practically in an instant, with the VIX retreating from its August 5 spike to below its long-term average in just seven days (!), the fastest such retreat in its history. Commodities have edged lower this month while the US dollar index is down 3%, possibly suggesting a weak commodity demand (and global economic) outlook. The 10-year bond yield is 30 bps lower than it was in mid-July. Bitcoin is cheaper but gold is more expensive (risk off and geopolitical worries on?), while July’s small cap rally has yet to fully resume. Furthermore, the presidential election has undergone a transformation, with Kamala Harris suddenly presenting formidable opposition to Donald Trump. The market peaked on July 16, three days after the attempted assassination of Trump and less than three weeks after the Biden-Trump debate. Harris’ policy intentions remain unclear, but the “price gouging” proposal suggests that she does not intend to move to the right of Biden. So far at least, the Harris campaign has mostly sought to avoid focusing on the details of policy, a position that may be politically savvy yet one that could leave the market vulnerable to shocks if the reality conflicts with expectations.

It may be that earnings forecasts have come down as far as they will. Economic growth expectations are slowing but they are clearly positive for now and the Fed is about to start cutting rates, so earnings should hold up from here. An environment like this could nicely extend this economic cycle, favoring cyclicals over defensives. The three-month period after a rate cut cycle starts, however, has more often seen equity losses than gains. In the medium term, deficit indiscipline is likely. Both presidential candidates are proposing large tax cuts, but neither seems especially intent on paying for them. And the debt soars. The markets love it when politicians kick the can down the road. So, in this sleepy August week for markets, the DNC celebrated optimism and joy, with the help of celebrities and political rock stars. Reaching out to women (reproductive rights) and the mostly young, lower-income independent bloc (grocery store prices) was savvy to behold. Did you watch? Or are you still at the beach?

Positives

• How the West was won over Fed Chair Jerome Powell delivered dovish remarks at Jackson Hole, saying “the time has come for policy to adjust.” The market expects a full 100 basis points of cuts this year, and minutes of the FOMC’s July meeting show that the “vast majority” of members thought it would be appropriate to cut at the next meeting.
• Lower rates helping out Sales of new homes jumped 10.6% in July, significantly better than expected, to an annual rate of 739K, while prices fell 1.4% y/y. Sales of existing homes rose 1.3% in July to a 3.95 million annual rate, as expected. The median price rose 4.2% y/y, and the supply of homes declined 0.1% to 4%.
• Across the pond Eurozone PMIs increased in August, with the composite gaining a point to 51.2 and the services PMI rising 1.4 points to 53.3, largely due to the Paris Olympics. Manufacturing, however, ticked down 0.2 points, falling to an eight-month low of 45.6.

Negatives

• US PMIs a mixed bag S&P Global’s US manufacturing PMI fell 1.6 in August, to 48.0, the weakest number this year and a soft reading for an expanding economy. New orders, which spent most of the first half of the year in expansion, continued to contract. The services PMI, however, rose 0.2 to 55.2, above consensus. The employment index fell to 48.7.
• Payrolls revised down The Bureau of Labor Statistics revised its count of nonfarm payrolls downward by 818K jobs. The downward revisions were focused in professional and business services, leisure and hospitality, and manufacturing. The market mostly took the news in stride, and it could be seen as helping to make the case for rate cuts starting in September. Importantly, jobless claims remain modest.
• Less bad The Kansas City Fed’s manufacturing survey showed that business activity in its district continued to decline, albeit less than last month. The composite index came in at -3, versus July’s -13. Durable goods manufacturing slipped, while nondurable came in flat.

What Else

1971 is having a moment Kamala Harris proposed a ban on price gouging at the grocery store. This is reminiscent of President Nixon’s 1971 attempt to impose price controls. That policy worked briefly – until it didn’t. Another policy Nixon imposed at the time? A 10% tariff on imports, like Trump has proposed.

Where are the bond vigilantes? Between 1947 and the global financial crisis, the annual deficit was never more than 6%. The Congressional Budget Office projects that the deficit will be at 6% for the entire next decade. Years of a zero interest-rate policy seem to have blunted debt worries.  

Antitrust ambivalence? During the Biden administration, the Federal Trade Commission and the Department of Justice have challenged more merger attempts than in decades. That might continue if Harris were to win – witness her recent talk about price controls – but the influence of Silicon Valley tech donors might prompt a less-hostile antitrust approach.