Swamp root

I traveled this week to Binghamton, NY, which ranks just after Pittsburgh in the list of cloudiest US cities, but the sun was shining and the investor audience was warm in the historic Remlik Building, a prominent example of the Beaux Arts architecture there. Among my advisor hosts was a former 20+ year news anchor (and local celebrity!) now anticipating news from the Fed like the rest of us. While rate cuts aren’t always good news, they have been lately; after the beginning of each of the last five cutting cycles, the S&P 500 has risen on a one-, three-, six- and 12-month basis. Tell that to the market, as we’ve just completed the worst week for the S&P this year and in only four trading days! The day after Labor Day was the S&P 500’s worst start to September since 2015 and the fifth-worst in data going back to 1928. Seasonally, the time from August to Election Day is typically difficult. Going back to 1928, volatility reaches an election-year peak in late October and early November. As if on cue, Nvidia’s $279 billion collapse on Tuesday was the largest one-day drop in history. The company has 10 of the 20 largest one-day declines on record and nine of the biggest gains. Apple has five entries on each list, in a sign of Magnificent Seven dominance and volatility. The forward P/E spread between value and growth stocks is stretched (seventh percentile historically), suggesting an advantage for value over growth. Market breadth is good, with five sectors hitting all-time highs in August: Financials, Technology, Industrials, Utilities and Health Care. The Magnificent Seven’s rise has reflected the high earnings growth rates of big tech companies; analysts expect that advantage versus the broader market to narrow substantially in 2025. Indeed, market breadth is good, if no recession. The S&P 500 has risen in nine of the last 10 months. Since WWII, the economy has never fallen into recession in the 12 months following such a setup. Both the S&P and the NYSE Daily Advance/Decline recently touched new record highs – a market this strong doesn’t ordinarily lead to trouble.

Don’t put that tonic away just yet. The yield curve has shown signs of uninverting lately. That may not be good news – while the yield curve inversion is a traditional sign that a recession is coming, it’s the uninversion that typically indicates the downturn is imminent. Gasoline futures have fallen below $2/gallon to levels last seen in December 2023, when Jerome Powell attempted to pivot to a dovish stance before last winter’s surprisingly strong inflation readings stayed his hand. Everyone likes paying less for gas (and falling gas prices bring down headline inflation), but it raises the question as to why demand is so weak. On the other hand, macro indicators are within normal ranges, the manufacturing PMI excepted. The unemployment rate has risen in recent months, but this feels more like normalization, since it’s still quite low by historical standards and ticked lower, not higher, this month. For its part, the Atlanta Fed’s GDPNow website currently estimates Q3 growth at a reasonably solid 2.1%. In general, the global view shows the US slowing and a sluggish China which, taken together, will tamp down growth in Europe and emerging markets. Whither a global soft landing?

The August jobs report showed a labor market that’s neither in crisis nor especially robust. So far, employment seems to be just normalizing, with no absolute scarcity of openings but far fewer workers saying that jobs are plentiful. Small businesses, as measured by the NFIB survey, find hiring a challenge – but more like the pre-Covid than post-Covid years. Americans’ workweek has grown shorter in the sense of shorter hours and more part-time work, perhaps a consequence of pandemic-era labor hoarding. Perhaps employers have been protecting profit margins by cutting workers’ hours rather than laying them off outright. Usually, once unemployment starts to rise, it does so quickly. That has not been the case so far this cycle. Yet manufacturing jobs have been in contraction for more than a year. While much of the inflation question seems to be resolved, wages remain a sticky issue and one that the Fed will need to watch closely. The Fed has started monitoring an uptick in sales of dinner sausage, an inexpensive substitute for other meats, which may suggest the consumer is stretched thin. Today’s mixed payroll report fueled the 25- versus 50-basis point September rate cut debate. The last several months’ figures were revised downwards, and this month’s job gains were in just a few sectors. And while the participation rate held steady, women have seen gains but the rate for men has been declining. What’s up with that? Interestingly, Binghamton is the hometown of Twilight Zone’s Rod Serling and the burial place for 1918 Kentucky Derby winner Exterminator (a big earner, who had 50 victories in 100 starts) in the pet cemetery. Historic Remlik’s was named in honor of Dr. Willis Sharpe Kilmer (spelled backwards), most famous for his patented Swamp Root formula – at least until the 1906 Pure Food and Drug Act. It’ll cure what ails you!

Positives

• Jobs just normalizing, nothing worse? The unemployment rate fell to 4.2% though payrolls only added 142K jobs versus 161K expected. The gains were in health care, leisure and hospitality, and construction. Wages rose 3.8% y/y versus 3.7% expected. The JOLTS report showed both quits and layoffs at low levels and job openings versus employed now balanced.
• Productivity is the elixir Nonfarm business productivity rose higher in Q2 to an annual rate of 2.5%, up from a previous estimate of 2.3%. Business output came in higher than previously believed while compensation rose more slowly than previously thought. Unit labor costs grew at an annual rate of 0.4% versus prior estimates of 0.9%.
• Activity just normalizing, nothing worse? The Fed’s Beige Book showed “flat or declining activity” in most of the 12 bank districts. However, in most districts expectations were for activity to be stable or improve somewhat in the months ahead. Wage growth, importantly, was modest as labor market demand gradually weakened.

Negatives

• Manufacturing is weak The ISM manufacturing report at 47.2 disappointed consensus of 47.5. Of concern, new orders dropped to 44.6 versus July’s 47.4 even as inventories rose, an unsustainable situation. The ISM production index fell to its lowest level, aside from the pandemic, since April 2009. ISM services came in little changed at 51.5.
• Financing is expensive Construction spending fell 0.3% m/m versus expectations of a 0.1% increase. The weakness in the July number stems from a decline in private residential construction (0.4% m/m), led by a 1.9% m/m drop in single-family. Car sales also fell 4.4% m/m in August, another likely consequence of high rates.
• Trade balance widens The trade deficit increased by $5.8 billion in July, to $78.8 billion, a two-year high. Most export categories did well but autos fell 11.2% on the month and consumer goods dropped 3.6%. Imports of industrial supplies and materials rose by 5.1% while capital goods increased 4.1%.

What Else

Slow and steady Forty-five percent of respondents to a recent survey want to quit their job, a higher level than in recent quarters. The Energy sector has a 25% y/y increase in Glassdoor job posts, by far the most of any sector. Overall, the study pointed to a slower but more sustainable pace of job growth.

Politics ain’t beanbag Harris has raised more than $500 million already and as of July 31 had nearly twice as much cash on hand as Trump: $481 million versus Trump’s $264 million. PAC funding, however, has gone the other way, with some $300 million for Trump to Harris’ $200 million.

Waiting until the ink is dry Per research from Goldman Sachs, each 1% change in the tax rate adds/subtracts nearly 1% to S&P 500 earnings. When corporate tax rates were cut in 2017, the index quickly rose to reflect this earnings boost, suggesting that the market will wait for clarity before moving on tax news.