[ad_1]
Well, thank goodness that is over. Federal Reserve Chair Jerome Powell’s Jackson Hole comments were mildly hawkish, but the market had the tone perfect before the speech started on Friday. Powell reiterated: “Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.” That is exactly what the markets have done this month. Rates have just adjusted higher to account for the strong economic reports, and some sectors — technology, communication services, and some consumer discretionary — have seen a modest re-rating of their stock prices. In other words, the market has adjusted to the possibility of higher growth. What’s next? The good news is, even though much of the trading community will be off this week, we are about to exit this news vacumn we have been in for the past couple weeks. The bad news is, stocks still aren’t cheap, rates still seem like they want to push higher, and China is definitely weaker. All of which leaves stocks vulnerable in September. Jobs and inflation data This week will bring important data that will help determine if we are indeed getting the “below-trend jobs growth” Powell is looking for. The job openings and labor turnover survey, or JOLTS report, is out on Tuesday. The July personal consumption expenditures, or PCE deflator, comes out on Thursday, followed by the nonfarm payrolls report on Friday. Stocks are vulnerable in September: The ‘pain trade’ is down After that, it’s time to repair some damage to the markets. Here’s the good news: even though stocks have been straight down most of this month, 5% off the highs is a pretty garden variety correction. Oh sure, there’s been some damage. The advance/decline line has had a terrible August. Less than 20% of the S & P 500 is up this month. Banks have been routed again. The small-cap Russell 2000 is sitting on its 200-day moving average. About 20% of the Russell is banks, and the regional banks have put in a very poor performance this month. Almost all of the roughly 140 stocks in the Regional Bank ETF (KRE) are down this month. Energy stocks, a critical component in the “broadening out” rally that started the month, have also stopped advancing now that oil has gone from $85 to $80 in the past couple weeks, and natural gas has gone from $3.00 to $2.55. Still, the S & P 500 has gone from roughly 20 times forward earnings at the start of the month to a little less than 19. That is still a growth multiple: the market is expecting earnings to expand. Right now, stocks aren’t reflecting much of an economic or earnings slowdown. Earnings estimates for the next few quarters are indeed expected to be higher than the second quarter, but have been relatively steady recently. Trough earnings: Up from here? (S & P 500 earnings estimates) Q2: $54.54 Q3: $55.98 Q4: $58.01 Q1 23: $57.73 Q2 23: $61.08 Source: FactSet This means the market is betting on a very modest slowdown at best. That means the “pain trade” (what would cause the most discomfort to the most investors) in September is for strong growth to continue, rates continue to creep higher, and the markets to go lower. What is happening with inflation? Here’s the bad news: we have rarely been so clueless about the path of the economy. Is the economy going to reaccelerate, is it going to slow down just enough (Goldilocks), or is it going to slow down much more than anticipated? Fed officials seem uncertain about what to do. Boston Fed President Susan Collins said in a Financial Times interview that rates may need to rise further as it isn’t clear inflation is on a sustainable path back to 2%, but Philadelphia Fed President Patrick Harker told CNBC that additional rate increases probably won’t be required . The Europeans are also still worried about inflation. ECB Governing Council member Joachim Nagel, who is also president of the Bundesbank, said he is not convinced inflation is under control enough to halt further rate hikes. “It’s for me much too early to think about a pause,” he said. In other words, this inflation story could go either way. And that is a “known unknown” we are just going to have to live with. Nvidia and AI stocks: how much more do you want? Finally, a word on the AI play. Many investors have speculated that much of the demand for artificial intelligence chips has been pulled forward this year. I don’t know if that is true, but it sure looks like much of the demand for AI stocks has been pulled forward. AI beneficiaries, year to date Microsoft: up 35% Alphabet: up 48% Nvidia: up 214% Cisco: up 16% Amazon: up 58% Nvidia went from $432 on the close on Aug. 18, to $471 on Wednesday’s close — a gain of nearly 10% in three days. It opened post-earnings on Thursday at $502, then promptly plummetted back to $471 by Thursday’s close, before closing Friday at $460. AIQ 1M mountain One month performance This is a sign of toppy action, but I’m not sure it is the beginning of the end for the AI play. The main players in AI have held up remarkably well. The Global X Artificial Intelligence ETF (AIQ) , a basket of companies linked to the AI trade, is down over 7% this month after being up more than 40% for the year going into August. Still, the AI faithful have not been engaged in wholesale dumping of the largest holdings in the fund. Global X Artificial Intelligence & Technology ETF (AIQ) (largest holdings, month to date) Alphabet: down 1.8% Nvidia: down 1.5% Cisco: up 7.0% IBM: down 0.8% Amazon: down 0.3% Bottom line: right now, the downdraft in AI leadership stocks, like the broader downdraft in the market, is very modest. “The re-pricing is creating a pause that will refresh, in our opinion,” Chris Harvey, head of equity strategy at Wells Fargo, said in a note to clients. Be thankful it’s not August 2022 in Jackson Hole Finally, if Powell has you nervous that he is sounding too hawkish, consider what happened right after he gave that terse speech in Jackson Hole last year. The market went straight down — for the next six weeks. And I mean down, like close to 17%, from about 4,200 to about 3,500. That’s not happening this year, at least not from this speech. A lot has changed since then.
[ad_2]
Source link