The Market Is in Transition as Summer Comes to an End
The market is slightly negative in the early going Tuesday after the holiday weekend. The setup for the week hit on Friday, when the August jobs report came in at 162,000 against expectations of 53,000 and the summer weakness was revised away. The market reacted badly because a healthy labor market was the one thing holding back the inflation hawks.
The likelihood of a quarter-point hike on September 16 now sits at 60%. The likelihood of at least one hike by the end of the year is 86%.
From Earnings-Driven to Macro-Driven
The Wall Street Journal ran an article last night stating that the market is moving from being driven by earnings to being driven by the Fed, inflation, and interest rates, and that the action is likely to be choppier. One strategist described it as rates driving the car for equities in recent weeks.
That is a fair summary of what I have been writing about for weeks. The summer offered opportunities as companies delivered profits, allowing investors to look beyond the bond market. The fall will be harder because earnings are done, expectations are very high, and the only major news flow is the macro data and a Fed meeting, where the chair has already made the case for higher rates.
Rising oil, growing federal deficits, and a deluge of technology company bonds competing with the Treasury for investors’ cash are driving interest rates. I have been writing since August that AI borrowing is crowding out government paper. It is now mainstream reporting.
The Odds Keep Whipsawing
Fed Chair Warsh’s approach to monetary policy is to abandon forward guidance and take his cues from markets. That has left traders reading every governor’s speech and every data release for clues and that creates uncertainty. Hike odds for the September meeting sat at 35% before his Jackson Hole speech, jumped to 58% after it, fell to a coin flip on Fed Governor Waller’s comments Thursday, and went back to 60% on Friday’s jobs report.
Four sizable swings in interest rate odds in eight sessions makes for tricky trading and it is likely to continue until the Fed actually makes a decision.
CPI and PPI Decide It
The Friday jobs report impacted the odds of a rate hike but that is not the final say on the matter. Inflation data this week will hit with PPI on Thursday and the August CPI on Friday. Waller said last week that his vote depends on CPI, and Warsh has been clear since Jackson Hole that inflation rather than employment is his concern. A strong jobs number gave the hawks room to move and a hot CPI will be a convenient justification.
One issue that is of particular concern is the average price of diesel. The national average hit a record $5.85 on Friday, up from $3.71 a year ago. That is a 58% increase in the fuel that is used by truckers to move goods across the country. That increased cost is eventually passed through to consumers but there is a lag effect.
The bond market is not optimistic about rates. The 20+ Year Treasury Bond Fund ($TLT) is lower again Tuesday morning and sits not far from the lows it hit on August 18. When the long end keeps making lower lows into an inflation report, it is telling us what it expects the report to say.
The Same Conditions, Now With Broader Selling
I have been writing for a while now about the combination of a lack of positive catalysts and negative seasonality, and both are still in place. What has changed over the past week is the character of the selling. There is still some rotational action but it has cooled considerably, and what replaced it is broader selling that is putting more pressure on the indexes.
That is the shift from a market where money moves within various sectors to one where money moves to the sidelines. That is why there are not many good reasons to chase entries right now. The names that are sold in a rotation come back when the rotation reverses. The names that are sold in a liquidation come back when the liquidation is finished, and that could take a while.
Game Plan
My focus is on navigating potential weakness and sharpening my shopping list while the market works through this. I want to be positioned for a bounce when negative seasonality ends and third-quarter earnings begin in October.
The complication is the calendar. The midterm elections on November 3 come after most of the big earnings reports, which means the seasonal turn and the earnings catalyst arrive before the political uncertainty clears rather than after it. That suggests building positions incrementally through October rather than expecting one clean turn. It means being prepared for higher levels of volatility because the election is likely to suck up a lot of oxygen just as earnings season starts to come to an end.
At the time of publication, Rev Shark had no positions in any securities mentioned.
