Flip the Script

In the words of Ron Burgundy (“Anchorman”): “Boy, that escalated quickly. I mean that really got out of hand fast.”

The soft-landing theme was fun while it lasted, but that script got flipped in a hurry by a series of weaker than expected economic data. The ISM (Institute fro Supply Management) manufacturing survey was reported at 46.8% vs. expectations of 48.8%. The details weren’t any better. New Orders, production and employment were contracting at a faster rate. The coup de grâce was Friday’s employment report, which showed that the economy added only 114,000 jobs in July, far less than the 175,000 that was expected and the unemployment rate jumping to 4.3% from 4.1% last month. All of a sudden, we have a recession concerns and a risk-off mentality.

The result was that 2 days after the Fed left rates unchanged, on Friday morning, the market was expecting four ¼ point rate cuts (in other words, a full percent) by year end. The shift in sentiment has been as swift as it has been dramatic.

The broadening of the market beyond technology and into ‘everything else’ that was briefly evident in July was predicated on a soft landing. An economy that is holding together combined with lower rates and some weakness in technology was an ideal scenario. But any signs that the economy was rolling over would be problematic for stocks in general, and that is precisely what we got with the initial unemployment claims and unemployment rate.

Over the last few weeks, we have cautioned that it was far too early to declare victory over inflation and a successful soft economic landing. This week we will reverse course and say it is far too early to assume a recession based on a few, admittedly weak, data points.

However, we have consistently cautioned that the Fed’s ability to engineer a soft landing is very limited. History makes this very clear. With the Fed’s top priority to control inflation, that unwillingness to ‘cut too soon’ naturally leads to a bias to be too late, in other words, a hard economic landing. Thus, we would not be shocked in the eventual outcome leads to a recession.

Disappointing Earnings

The dour mood has been accelerated by some poor earnings reports as well. The mega-cap tech stocks generally hit their bogies, but guidance was flat at best. There were more disappointments than upside surprises. Amazon (AMZN), Alphabet (GOOGL), and Microsoft (MSFT) all came up short in one way or another. Admittedly, the bar was set very high for the second quarter, but the big AI investment push seems to have peaked. Tech has been the market leader for a long time and if tech weakens, but it is not at all clear what sector(s) will be the new leaders. This is the period when the portfolio hedges that have been so frustrating begin to work in our favor.

Escalator up, Elevator Down

Markets have long been said to take the escalator up and the elevator down. This time is no different. The elevator rise can be disturbing at times, but those are the periods of the greatest opportunity. Market valuations go from one extreme to the other. Putting money to work after market corrections often provide the greatest reward in the long run.

The elevator ride down is typically fast and a little scary. This episode in unlikely to be different. This correction can get worse before it gets better. As this is written, the S&P500 is only back to a level last seen in early June! It takes another 6% decline just to get to the 200-day moving average. Hold on tight, we will get through this.

Have a great week!

What We’re Reading

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All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

 The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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General News

By: Adam