As we enter the final days of summer, I'm reminded of that time of the year when vacations and relaxation ends as the beginning of school and busy fall schedules begins. Markets have given investors welcome returns over the course of this summer. In June of last year alone, equity markets were down more than 8%, compared to June of this year when markets were up more than 6%. What's in store for the Dog Days of Summer this year?
The inspiration for this week's musings is the 1993 movie "The Sandlot". This movie was successful at the box office given its paltry budget ($7 million budget vs. $34 million box office). However, the film has become a "cult classic" with more than $72 million in NHS/DVD sales. Here's some trivia to enjoy about the film:
In 1998, Micheal Polydorous, a childhood classmate of David Evans (writer & director of "The Sandlot") sued 20th Century Fox claiming that the character Michael "Squints" Palledorous was derogatory and caused him shame and humiliation. The court found in favor of the film-makers.
The actor who plays "The Babe" is Art LaFleur, who also starred with James Earl Jones in the 1989 hit "Field of Dreams," where Art played one of the disgraced White Sox players. Despite playing in these two classic baseball movies, James Earl Jones actually hates the game of baseball.
The famous line in the film, "You're Killing me, Smalls," is a paraphrase from a famous quote by Lou Saban, coach of the Denver Broncos in 1969. The original quote was "They're killing me, Whitey. They're killing me," which was included in the greatest mic'd up moments in NFL history.
The late basketball great, Kobe Bryant, used to watch this film every 4th of July with his family.
Here's what we've seen so far this week...
You're Killing Me, Smalls! Bear market commentators are out in full force this week as equities sold off more than 1% on Wednesday. Commentators love to play on the emotions of investors, but rarely recognize or communicate how market trends really work. It urges one to look at them and yell as Ham Porter did in "The Sandlot," "You're killing me Smalls!"
Context is important when looking at a single week or single day's return in the markets. First, equities have gained nearly 29% off the bottom hit on October 13th of last year. Bears will contend that's too great of a return in a short time frame. Well, that might be true if markets have been up the past three or four years straight. But that's not the case. The S&P 500 Index is still more than 290 points away from the high realized on January 4th of 2022. Markets typically don't reach a previous high and stop. While we are likely to peel back a little from current levels (more on that later), the reality is that we are back in a bull market phase for the time being. In fact, even after Wednesday's pullback, J.P. Morgan trader Matt Reiner stated, "Despite concerns, there is no sign of panic in the market; instead, there is a slight inclination to buy on the dip across most sectors."
This is evident the latest Goldman Sachs Sentiment indicators. Seven of the indicators are squarely in the "risk-on" position, while another 3 are trending in that direction. The reality behind the pullback is that markets responded to the U.S. credit downgrade from AAA to AA+ announced by Fitch on Tuesday. According to the report, the U.S. has uncertainty surrounding political parties and their ability to negotiate the debt ceiling. Hmmm, where have we heard this before? That's right...on August 5th, 2011, S&P downgraded the U.S. credit rating one notch, just as Fitch did this week. What happened during that downgrade? Markets sold off 6.6% the following day. So far, markets have handled the downgrade much better this time, declining only 2% since the downgrade. And, just like S&P in 2011, Fitch declared the outlook for the U.S. "stable" which means the current rating is likely to stay put. The institutional investors appear to still be in bullish mode as U.S. equity exposure among CTAs has increased nearly 6-fold since March and is steadily approaching the level last seen in January of 2022.
I found a reference in an article about Fitch's downgrade to January 6th of 2021. According to the article, Fitch addressed the trouble at the Capitol on Jan. 6th with the Treasury Department as one of the reasons for their downgrade, citing a "senior director" at Fitch. However, no where in Fitch's report is Jan. 6th referenced. So what's the point? Investors need to read commentary carefully in order to determine what is real and what is speculation. Conclusions based on fact and data are more reliable that one's personal opinion.
Dog Days of Summer. "The Sandlot" is based on and was filmed during the ending days of summer we commonly refer to as "Dog Days" - a period in the U.S. known as July 3rd through August 11th. The concept of the Dog Days apparently goes back as far as ancient Greece, Egypt, and Rome.
The child actors in the film often refer to the summer working on the film as the greatest summer of their lives. An incident that occurred while filming involved Tom Guiry, the actor who plays Smalls. One day during the summer of filming, the heat was so great (105 degrees) that Guiry fainted and fell into a cameraman during a scene in which the boys were running. We've been seemingly reminded how hot this year's Dog Days have been (supposedly the hottest in 120,000 years). And yet, the State of Nebraska posted a link just a few days ago that the temperatures on July 25th, 1936 reached a high of 115 degrees. That was at a time that air conditioners were not widely available in all homes (hence the Nebraskans sleeping on the State Capitol lawn).
This year, the hottest day in Nebraska was July 28th, when temperatures reached a balmy 102 degrees. Just as with the weather, we can look at history and get a glimpse of how markets tend to act. We shouldn't be surprised if the pullback this week were to deepen. August is typically the worst month of the calendar year for inflows into equity mutual funds and ETFs.
Overall, the fundamental data has been positive this week. The jobs data was solid. The ADP Private Jobs Report showed that 324,000 jobs were added, which was above the 189,000 expected. The government's report this morning disappointed, but was slightly stronger than last month. July saw 187,000 jobs added, which was below the 200,000 expected, but still higher than June's 185,000 figure.
In addition, Average Hourly Earnings increased 4.4% (YoY), which was even with last month's reading. The Unemployment rate dropped slightly in July from 3.6% to 3.5%. And, while the JOLTs Job Openings declined slightly, there are still 9.5 million jobs available, which remains extremely elevated relative to historical norms. On the flip side, employers seem eager to keep current staff as Job Cuts were down sharply in July (23k vs 40k in June). With unemployment at historically low levels, wage growth remaining strong and inflation having declined below wage growth, there is reason to believe that consumers can maintain spending momentum. Currently, the markets are betting that the Fed is finished raising rates. The Fed Futures show an 86% probability of no rate hike in September. If jobs are a plenty and consumers have relief from interest rates and inflation, economic growth looks to be solid heading into the fall and winter.
And, the famous scene that influenced a generation...
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