Volatility (often measured by the VIX index) has been relatively higher since mid-July, as expected for this part of the year. However, the stock market indexes haven’t been down as much as Seasonality would normally suggest this far into September. That’s not to say that there haven’t been bigger swings that follow volatility spikes, but overall, things aren’t looking as bad as they could right now.
Some indexes have yet to reclaim their highs in July: NASDAQ 100, Large Cap Growth, Small Cap, and Emerging Markets. What we notice about this list of laggers is that some had been the leaders until those July peaks. Now there is a rotation into other market segments.
Big-name stocks like Nvidia (NVDA) and Apple (AAPL) are included in the stocks that haven’t reclaimed their early summer peaks.
But even with this recent market resilience, we still need to get through October – another month that tends to have its own “scary” moments. For now, we remain more invested than we had expected this month.
The Federal Reserve did finally cut interest rates by 0.50%. At our monthly Shadowridge webinar, which was a week before the Fed meeting, I talked about how if the rate cut is only 0.25%, then the economic slow-down is just that. However, if the Fed cuts rates by 0.50% (as they did), then I said it’s possible (and likely) that the economy is actually worse than they are letting on. There are already high odds that the Federal Reserve will cut rates by another 0.50% in November. If that is the cut we get, then we might be closer to recession than we thought.
The other factors that support the likelihood of a recession in the near-ish future are, first, that the yield curve (the difference between the 2-year and the 10-year Treasury Yields) has finally un-inverted. Second, the Unemployment numbers are coming in worse and at a faster pace than anticipated. Third, we’re seeing small business bankruptcies on the rise. None of these are good forward-looking data points.
Our Shadowridge Long-Term Trend indicator is still holding onto its positive reading which began in the month of May. And it has held a positive reading for much longer than expected this year. For now, even with higher volatility, we’re seeing enough money flowing into the market to keep prices rising. So we’re continuing to ride the wave.
Our Mid-Term Cycle went positive on September 13th after another short-lived sell-off in early September. Even with the volatility, sell-offs are being met with enough buying to keep the overall market afloat.
As of Wednesday night (September 25th, 2024), our Shadowridge Dashboard showed Positive to Negative market sectors as 9 to 2. The only weak sectors right now are Health Care and Technology, which had been the stronger parts of the market earlier this year.
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.
This month’s chart comes from Optuma’s Twitter/X account. They charted the S&P 500 and noted where the Federal Reserve cut Interest Rates by 0.50%. In the past 25 years of history, rate cuts of this amount did tend to precede some downward movement in the market. Many are saying that one year after these cuts, the market trend was positive. What is left out in that statement is the path taken to get there. While this data point isn’t a signal, it provides context that helps us make more informed decisions when signals do start to trigger.
Twenty-Five Year chart of the S&P 500 Index and where the Federal Reserve cut rates by 0.50% (Source: X.com/Optuma)
The bond market has finally woken up from its multi-year slumber. However, so far it is acting like the old adage “buy the rumor” (going up into the Fed Announcement of falling rates) and “sell the news” (once the cut happens, they started to sell off). That’s not to say that the bond market’s upward trend is done, but maybe it’s time for a pause to digest the new information. We still believe the bond market could have some of the best risk-adjusted returns available in the next several months. Or, until the Fed decides to change direction and raise interest rates again (which is another theory I’m hearing out there now).
Bottom Line: we would have expected to be in a full-on defensive allocation right now based on seasonality. But for some reason, the “seasons” have shifted. For now, we are much more invested than anticipated, but with the view of selling or protecting at the first sign of trouble. So far, we aren’t seeing it, and current data looks ok in the short-term. We still have the election coming up, but our view is that potential volatility around that event might not be as crazy as many expect. We’ll have to see what the data is telling us at that point and act accordingly.
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.