Monthly Markets Memo - September 2024

August was a rollercoaster of alternating negative and positive economic data surprises. With frequent shifts and turbulent whiplash, it can look less like flying and more like falling with style.

Falling with Style

“That’s not flying, that’s just falling with style!” – Woody, Toy Story (1995)*

In August, US and Int’l equity markets, as well as bond markets saw positive monthly returns, but the intra-month price swings were wild, particularly the first half of the month. A jobs report that missed expectations on the second day of the month had markets seriously considering that the Fed had missed its window for a soft landing and that the economy was headed for a recession. These fears were ultimately assuaged when initial jobless claims didn’t show a corresponding spike, CPI continued to come in soft, and we saw another good month in retail sales, indicating that the consumer (67% of US GDP) remains strong. The primary topic of debate among Fed watchers for the foreseeable future is going to be whether the economy is still on a steady glidepath to a soft-landing (i.e. subduing inflation without tipping the economy into recession) or if the FOMC is behind the curve and waited too long to normalize the restrictive monetary policy. We suspect that over the next 12 months, the FOMC will have to deal with plenty of air pockets and the turbulent whiplash of alternating negative and positive economic data surprises (like we experienced in early August), all while expressing confidence in their angle of approach; even if at times, it looks less like flying and more like falling with style.

Number of the Month

The preliminary revision to Employment by the BLS for the period of Apr 2023 – Mar 2024. It’s the largest negative revision from the annual benchmarking of the Current Employment Situation (CES) to granular state unemployment insurance tax records since 2009. It means that the nearly 242,000 jobs per month thought to have been created during that period were 30% lower at 174,000 jobs per month. While the relevant period is 6-18mos ago, the magnitude and negative direction are likely to add fuel to combustible concerns of a concerning shift in labor market trends.

Quick Hits

Carry On My Wayward Yen

The first days of August saw a violent explosion in volatility across asset classes as several extremely crowded strategies that had thrived under low volatility and stable interest rate relationships rapidly unwound. One of these crowded trades that received a lot of attention is what’s known as the Yen Carry Trade: in which investors borrow in the relatively low-interest rate currency of the Japanese Yen (JPY) and buy a high-interest rate currency-denominated asset, like the US Dollar (USD) currently or certain emerging market currencies (e.g. MXN). This trade ran into a serious crunch when the Bank of Japan surprised markets by raising rates, followed days later by the weak July employment report that spooked markets and saw a steep drop in US yields. To emphasize the magnitude of the volatility we experienced that first week of the month, the CBOE S&P 500 Volatility Index reached it’s highest intra-day levels since March of 2020.

Jackson Hold On We’re Going Home

At the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, Federal Reserve Chair Jay Powell delivered the following message to markets: “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks." Rates will be coming down, what remains TBD is by how much and how quickly.

Made From Concentrate

As of 8/31/2024, the largest six companies in the S&P 500 by market cap constituted nearly 30% of the overall. That’s roughly an average 5% weighting of the largest six companies. While they do not actually have a weighting of 5% each index (AAPL 7.0%, MSFT 6.5%, NVDA 6.2%, GOOGL/GOOG 3.7%, AMZN 3.4%, META 2.4%), if that were to occur, the diversification requirements of the statute governing registered investment companies (i.e. Mutual Funds, ETFs, etc.) could restrict passive index funds from faithfully tracking the underlying large-cap indices like the S&P 500.

On Deck this Month

09/03 – ISM Manuf. (Aug)
09/05 – ISM Svcs. (Aug)
09/06 – Emp. Report (Aug)
09/10 – First Presidential Debate
09/11 – CPI (Aug)
09/17 – Retail Sales (Aug)
09/18 – FOMC Meeting: Rate Cut, Dot Plots, & Press Conf.
09/26 – Q2 GDP (3rd & Final Est.)
09/27 – Personal Income & PCE (Aug)

Chart of the Month: Big Tech CapEx-plosion

If there’s one theme that defines the current equities market rally, it’s the frenzy for all things AI. So much of the current lofty valuations for AI-related companies is based on optimism and qualitative speculation on the evolution of the technology and the future ability to monetize it. What is very objective and extremely quantifiable are the billions being spent in capital expenditures to achieve these goals. As the chart indicates, tech has evolved from an asset-light industry 20 years ago to one that requires hundreds of billions in spend to acquire the computing power required to hyperscale their AI models. For reference, Big Tech is less than a year from overtaking the total CapEx spent by Big Oil & Gas since 2004. One possible restraint on the growth of the computing hardware and datacenter buildouts comprising the capex from big tech is the utility scale power investments needed to serve this gold-rush. So far we haven’t seen a material inflection point in the rate of CapEx spend from Utilities and Power Producers. Keep an eye on this space.

Equities

MMM-Graph-3-Equities-(2).png

Fixed Income

Economic Data

INVESTMENT AND WEALTH SERVICES: Not a deposit | Not FDIC insured | No Bank guarantee | May lose value

*Toy Story (1995). Directed by John Lasseter, Buena Vista Pictures Distribution, 22 Nov. 1995.