It's been said that history doesn't repeat itself, but it often rhymes. I fall more into the camp that history does closely repeat itself as there are clear examples in history (World War I and World War II, for example). But, I digress. We have certain events and circumstances repeating in the markets that make one shake one's head.
The inspiration for this week's musings is the 1987 hit song, "Here I Go Again." Most Americans do not realize that the song was originally written in 1981 and released on Whitesnake's 1982 album "Saints 'N' Sinners." The song was a longer version on the original album. In 1987, Whitesnake had a completely different makeup, with David Coverdale (lead singer) as the only original member. They decided to re-record the song and released it on their U.S. title album, "Whitesnake." Here's some trivia about the song:
The original recording of this sone hit #34 on the U.K. charts in 1982. However, the re-recorded version reached #1 in both the U.S. and Canada in 1987. It also reached as high as #9 in the U.K. charts the second time around.
The second release of the song was during the MTV era and the video helped propel the song in the charts. The video featured shots of actress Tayny Kitaen on the hood of two Jaguars, which aided the video's success. One of the Jaguars belongs to Coverdale (in a relationship with Kitaen at the time) and the other Jaguar belonged to Marty Callner, the director of the video.
While the song is commonly thought of as an inspirational song about facing your challenges, the background proves otherwise. The song was written by Coverdale in Portugal about the breakdown of his 1st marriage and the loneliness that followed.
This song entered the news again in 2002 when baseball player Chuck Finley divorced then wife Tawny Kitaen after she was arrested for spousal abuse for kicking him with her high heels while he was driving a car. The DJ for the Chicago White Sox was fired after playing "Here I Go Again" in the stadium when Finley came up to bat for the Cleveland Indians.
"I don't know where I'm going
But I sure know where I've been
Hanging on the promises in songs of yesterday
And I've made up my mind
I ain't wasting no more time
Here I go again, here I go again
Though I keep searching for an answer
I never seem to find what I'm looking for
Oh, Lord, I pray you give me strength to carry on
'Cause I know what it means
To walk along the lonely street of dreams
Here I go again on my own
Going down the only road I've ever known
Like a drifter, I was born to walk alone
And I've made up my mind
I ain't wasting no more time"
Here's what we've seen so far this week...
Here We Go Again With The Shutdown Talk. Congress definitely has no clue where they are going, but they sure know where they've been. We've seen this play before and while media will hype the looming deadline, something will get done or the can will be kicked further down the road.
Members of the House are debating Defense Spending as part of the bill to avoid a government shutdown by October 1st. However, we've pointed out before that even if the government does shutdown, the affect on markets is marginal, at worst. Since the mid-1970s the U.S. government has shut down 20 times, with the average return for the S&P 500 Index being +0.04%. The market has been dealing with this little nugget all week, in addition to the "hawkish pause" announced by the Fed earlier this week.
Even though the Fed the federal funds rate unchanged at their Wednesday meeting, the market took exception to some of Chairman Powell's comments and the revelations from the meeting. Of the voting members of the Fed, 12 of the 19 see one more rate hike in 2023. In addition, Powell indicated that the full effects of Fed tightening were yet to be felt in the economy.
This sent equity markets lower as the market had been pricing in no further rate hikes in 2023. In fact, the futures still point to no rate hikes as the November futures show a 73% probability of no hike and the December futures show a 57% probability of no hike. What is also interesting is the double-speak from Powell who stated on Wednesday that a "soft landing" for the U.S. economy is a primary objective for the Fed, but that a "soft landing" is no a baseline expectation. Huh??? The Fed's own projections published on Wednesday saw an increase in GDP expectations from 1% back in June to 2.1%. Also, the projections showed a decrease in Unemployment from 4.1% in June to 3.8%. If those projections are met, wouldn't that signal a "soft landing?" The Atlanta Fed's GDPNow estimate is for +4.9% GDP in the 3rd quarter. This type of reading is considered robust and would likely qualify in the "soft landing" category. In other words, Chairman Powell definitely hasn't "made up his mind" and is willing to waste more of our time.
Investors Keep Searching For An Answer. After a rough 2022, some investors are wondering why they haven't fully participated in the solid equity returns of 2023. The answer lies in where the returns are being generated. For example, the S&P 500 Index is up more than 14% year-to-date. The average diversified "growth" portfolio is up barely double-digits this year. Why? The majority of equity returns can be attributed to only a few stocks and just a couple of sectors of the market.
While the broad S&P index is up more than 14% year-to-date, the more diversified version is lagging. The S&P 500 Index is a capitalization-weighted index. In other words, the largest capitalizations by company (index component) make up the larger portion of the index. For example, the top 17 holdings of the index make up more than 35% of the index as a whole. If we were to compare the cap-weighted S&P to the equal-weighted version (all 500 components weighted the same amount), the return of that index is up only a little more than 2% year-to-date. Why the stark difference? Because those top 17 holdings that are up at least triple digits this year (Nvidia, Tesla, and Meta) would get an equal weighting as those stocks up far less, thereby reducing the effect of those triple-digit winners.
We are still in throws of seasonality and a choppy September should not come as any shock. We have addressed the seasonality of September in the past two posts. In fact, the back-end of September tends to not be too kind to investors. September usually provides monthly losses, while the 4th quarter is typically strong.
Volatility in the 3rd quarter has been fairly tame as the VIX has been below the historical average since the end of May. In fact, this week was the first time since August 15th that the volatility index has risen more than 10% in a single day. The S&P has also been on a run of late. Until yesterday, the S&P 500 Index had not dropped more than 1.5% in a single day for 102 consecutive days. A decline was long overdue. According to Goldman Sachs, the corporate buyback blackout period will end in October and the November-December period could see daily buying to the tune of $5 billion/day. While there are some potential headwinds looming, the National Financial Conditions Index and the Financial Stress Index, as we pointed out last week, continue to point to loose financial conditions.
The famous video of "Here I Go Again..."
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