Markets have had a strong week and while led by technology stocks, overall breadth did improve. While there is some softening in the economic data, especially the job market, there's also plenty to cheer. September is historically a strange month for equities.
The inspiration for this week's musings is quite simple, "September" by Earth, Wind & Fire.
Here's some trivia to enjoy about the song:
The song went Gold after it's original release in 1978, selling more than 1 millions copies. Since streaming began, it has been downloaded/purchased more than 6 million times.
The song reached #8 on the Billboard charts, but hit #1 on the "Hot Soul Singles" Billboard chart.
Many have speculated that the opening line "the 21st night of September" had something to do with the birth of co-writer and band member, Maurice White's son's due date. But, he later confirmed that it had no real significance. It was chosen because it sang well.
The other co-writer for the song, Allee Willis, had trouble accepting "Bada-Ya" as a line in the chorus. However, Maurice said that it felt great and they were going to leave it in the song. Looks like he was right.
"Do you remember the 21st night of September?
Love was changing the minds of pretenders
While chasing the clouds away
Our hearts were ringing
In the key that our souls were singing
As we danced in the night
Remember how the stars stole the night away
Hey hey hey
Ba de ya, say do you remember?
Ba de ya, dancing in September
Ba de ya, never was a cloudy day"
Here's what we've seen so far this week...
Dancing In September. August started out rough, but equities rallied later in the month to almost break even for the month. September ought to be a welcome sight, given the past week was a strong one for equities. But, as we begin the college football season, we're reminded of the ESPN host Lee Corso who famously said, "Not so fast my friend."
Historically speaking, September is one of the worst months of the year for equities. Many think that October is the worst month of the calendar year because of the Black Mondays of 1929 and 1987. However, since 1970, September is the only month with a negative overall return.
Recent history, going back to 2004, is a little more upbeat, with September posting positive returns 63% of the time. The point being that September is not as consistent as the other months of the year. From a technical standpoint, equities do have the potential to head higher and perhaps provide a better return than typical for September. In July of this year, the Dow Theory trigger was reached, which bodes well for equities.
The Dow Jones Industrial Average and the Dow Jones Transportation Average reached 52-week highs in July. Do Theory suggests that when those indices both reach 52-weeks highs in the same period, the broader equities indices typically head higher. In fact, since 1950, Dow Theory shows the S&P 500 Index is higher by 10.5% 12 months after a Dow Theory buy signal. We are at some pivotal points in the economic cycle, as we'll discuss, but some technical indicators look positive for stocks going forward.
Never Was A Cloudy Day. Despite Powell's hawkish comments last week, markets continue to think that the Fed's rate hiking cycle is likely over. Fed Futures for the September 20th meeting moved higher this week to a 93% probability that the meeting will result in a pause in rate hikes. Futures for the following meeting on November 1st have moved dramatically in favor of no rate hike. What was a 50:50 probability just a week ago has moved to a 64% probability of no rate hike.
Personal Spending was higher in July (+0.8%) than expected and the previous month's reading was revised higher from 0.5% to 0.6%. Redbook Sales this past week were the highest (+4.2%) on a year-over-year basis since February 22nd of this year. A strong consumer means potential future economic growth. If the Fed is indeed done with rate hikes in 2023, that provides a cushion for consumers. This week, Fed Governor Bostic stated that the Fed's monetary policy is "appropriately restrictive" and that while inflation is still too high, it's on a "downward path."
The Core PCE Price Index is now at 4.2%, year-over-year. This is significant as it is below Powell's forecast of 4.3% and will allow the Fed to become more dovish. In addition, the employment data was a little soft this week. While Nonfarm Payrolls were higher than expected (+187,000 vs +170,000), last month's number was revised lower from 187,000 to 157,000. In fact, the previous 3 months' Jobs numbers have been revised lower. In addition, the Unemployment Rate moved higher for the first time in 3 months. In fact, the rate moved up to 3.8%, which is the highest in over a year. This would explain the jump in Fed Futures to a higher probability the Fed won't raise rates at this month's meeting, nor the one in November. If inflation will moderate from here, it would provide a strong backdrop for consumers through the end of this year.
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