Things are getting interesting out there in the market. August started off with a drastic sell-off, led by the NASDAQ and Technology sectors. Other indexes like the S&P 500 and Russell 2000, and even bond indexes, eventually followed. Then, as if there was no real reason for it, many of these indexes bounced back. Some reclaimed new highs, while a few others did not.
And after that? Most markets chopped sideways for the last couple of weeks of the month. The big news this Wednesday was NVIDIA (NVDA) earnings. Will has more commentary about this in his newsletter this month, so you can read it here: “Profiting from the AI Wave”
We are now heading into the part of the year where most equity indexes struggle the most: September and October. However, if we do get a sell-off through these months, that usually gives a nice set-up for a run up into year-end. Seasonality trends for both Election Years and non-Election Years support this potential movement. Of course, nothing HAS to happen in any given scenario, so we’ll just watch for the set-ups to take place and be ready to be very defensive if needed.
The Yield Curve (comparing the 2-year Treasury Yield with the 10-Year Treasury Yield) almost, but not quite, un-inverted. It’s been a couple of years at this point, which is unusual. But, when this important data point does un-invert, it gives a very likely signal of a recession coming in the next 12-18 months. For quite some time I’ve written about how that could correspond with the 18-year Real Estate Cycle which is due to end in 2026. That sets up the potential for a perfect storm of ugliness that we could see not just in the market, but in the broad (or even global) economies.
The Federal Reserve is expected to lower interest rates in September. The question now is – by how much? Last I saw, there was a 50/50 chance of the Fed executing either a 0.25% cut or a 0.50% cut. And virtually no likeliness of rates staying as they are. The one place I believe most investors will feel this is in savings account rates. I’d expect them to get cut rather swiftly when the Fed lowers rates. So the years of earning 4-5% in your savings account looks like they may be coming to an end.
Our Shadowridge Long-Term Trend indicator is still holding onto its positive reading which began in the month of May and continues into August (and likely September). There are currently still signs of strength, so the pullback I anticipate may not happen for a couple of weeks unless there is a drastic shift in money flow.
Our Mid-Term Cycle went positive on August 15th after the sell-off I mentioned above, but it looks to be weaking as the market grinds sideways.
As of Wednesday night (August 28th, 2024), our Shadowridge Dashboard showed Positive to Negative market sectors as 9 to 2. The weak sectors on our list are Technology and Consumer Discretionary – both were on the weak side last month as well. Strength has remained in HealthCare and Utilities, also as they did last month. This has certainly been a leadership change from the first half of 2024.
All 10 RGB Bond Indices are currently trending positive, above their 50-day Moving Averages, with Economic-Sensitive bond sectors remaining strong against Interest-Rate-Sensitive bond sectors. But with rate cuts on the way next month, we may see strength lean towards the Interest-Rate Sensitive bond sectors.
This month’s chart shows the past 20 years of Unemployment Data. I find this especially interesting given the election year, but even more so that this data also agrees with my Real Estate cycle hypothesis: that the economic environment could be setting up for something especially ugly in the next year or two. I drew 2 red lines showing the angle of increase in 2007 and how 2023-2024 has a similar slope. Rising Unemployment isn’t the best sign of a healthy economy.
Twenty-Year monthly chart of Unemployment Data above the S&P500 (Source: StockCharts.com)
After being flat as of my last month’s newsletter, the Bond Indices (the Aggregate and the 10-year Treasury) are finally coming alive and showing some strength. When the Federal Reserve cuts rates in September (as we expect), then we could see these two indices become worth owning again. In some cases, we’ve already dipped our toes into those waters, but we may see even justification for getting more aggressive in the bond space. But that would also likely pair up with a not-so-pretty equity market. Things could start getting very interesting soon.
Bottom Line: other than dropping Tech and NASDAQ holdings, not much has changed since last month in our holdings. Even after the early August rebound, we’re not seeing much reason to dive back into those areas. Seasonality trends suggest being ready to play it safe here, so that’s our plan at the first sign of trouble. But with every market drawdown comes a new opportunity. And that is something we are looking forward to after this passes.
Stay safe out there!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.