Presents our

Bi-Monthly

 ERPE Excerpts

John J. Gardner, CFP®, CPM®

blackhawkwealthadvisors.com

Bi-MONTHLY MARKET ANALYSIS &

ECONOMIC UPDATES

August 29, 2024

The Great Rate Debate

When will the Fed cut interest rates? How much? How many times? And, for how long? It’s helpful, also, to understand the “why?” It is only a matter of when, not if, the Fed cuts interest rates again. After rising rates 11 times between March of 2022 and July of 2023, the Fed has left rates unchanged since. So, the when is only a matter of time. One of the most debated issues on Wall Street going back to late last year is when and how much the Fed would lower interest rates in 2024. As of last December some economists and market analysts were calling for a many as 7 rate cuts this year. Consensus was for at least 3. No rate cuts yet. That could soon change. If Federal Reserve Chair Jerome Powell’s comments last week at the annual Jackson Hole, WY, global economic summit are any guide, the first rate cut could come in September with the next scheduled Fed meeting. That’s the when. But, why? The Federal Reserve Bank’s job is to manage risk of an economic recession. It’s dual mandate is price stability and maximum sustainable employment. It is a delicate act. Interest rates increases and cuts are one of the tools used by the Fed to do its job. While the economy is OK now, inflation has come down and the jobs market has cooled, the Fed hopes to manage future risks of recession by navigating a soft-landing. Most simply put, The Fed’s aim with a rate cut would be to stimulate the economy and employment in order to prevent an economic recession.

Now, back to when and other great rate debates. Again, last week Mr. Powell gave us a hint that a rate cut will be soon. “The time has come for [interest rate] policy to adjust,” he said. “The direction of travel is clear and the timing and pace of rate cuts will depend on incoming data.” Welcome to Fed speak! The financial markets translated those comments to mean the Fed would cut rates in September. As of today, the market has expectations of a 62% chance a quarter-point cut and 38% probability for a half-point rate reduction at the September meeting. How long and how much? There is now a high market expectation for as many as 5 cuts by next January. One and a quarter (1.25%) points are forecast by then, which could be 5 quarter point cuts or a half-point or 2 in the mix. For perspective on how these anticipated cuts would off-set the previous aggressive rate hikes, here is what the Fed did to win the fight against inflation:

So, expect a Powell & Co. to cut rates in September. Those calling for multiple rate cuts this year late last year may be right after all. As life teaches us, though, be careful what you wish for… you might get it. If the Fed takes a strong stance with its monetary policy and cuts rates 50 basis points in September, it may signal they see something we don’t – such as a weaker economy. And that’s a whole different story….

I have written a lot (too much) about interest rates and the Fed for nearly 40 years. One that I found interesting to re-read was my ERPE Excerpts from September 17, 2020 titled, “0 4-ever?”. The story then was that the Fed was committed to leaving interest rates near zero for longer in their effort to revive the Covid-weakened U.S. economy. As always prudently flexible, Powell said then, “We’re going to continue to monitor developments, and we’re prepared to adjust our plans as appropriate.” That should sound familiar.

Proper Perspective:  In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn’t help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective.

“If you live long enough, you’ll make mistakes. But if you learn from them, you’ll be a better person.”

~~ Bill Clinton, 1996

What Happened On This Day August 29, 1898 – The Goodyear Tire and Rubber Company, is founded.

INDICATORS OF INTEREST:

• Market’s Current Signal: Market in confirmed uptrend.  Analysis of the stock market over 130 years of history shows we can view it in terms of three stages – market in uptrend, uptrend under pressure and market correction. I analogize this to a traffic signal’s changing colors from green to yellow and then to red. It is still green. Since the 1880’s, this perspective has led to investment out-performance relative to market indexes. This is due to trend analysis which determines risk reducing, return enhancing market entry and exit points.

The Stock Market Trend: Market in confirmed uptrend.  After a market peak July 16 with the SP500 at 5,670, a market correction ensued with a 10% fall to 5,120 on August 5. The market’s trend turned bullish Tuesday, August 13. The fourth day of a new rally attempt confirmed the rally with a follow-through day. As of yesterday’s closing price the SP500 was 5,592, nearly all the way back from the August 5 low.

Here are key market levels as of Monday, August 26.

Recapping Last Week

U.S. equities rose and interest rates fell after Federal Reserve Chair Powell stated, “the time has come for policy to adjust”, the most direct signal yet that the FOMC intends to start cutting rates soon. The Russell 2000 index jumped 3.5%, while the S&P500 and Nasdaq Composite gained 1.4%. Energy was the only S&P500 sector to finish negative, pressured by lower crude oil prices. U.S. Treasury yields eased across the curve after Powell also remarked in his Jackson Hole keynote that confidence has grown for inflation moving towards the Fed’s 2% goal. However, he also issued a note of caution on U.S. labor markets, indicating that the Fed’s focus has shifted to ensure the economy stays near full employment. Several data points released last week suggested that the jobs market may not be as strong as previous reports had indicated. The U.S. Labor Department, as part of its annual benchmark revisions to the non-farm payroll numbers, reported that actual job growth was nearly 30% lower in the 12-month period through March 2024. This was the largest revision since 2009, although it still represented more than two million jobs created. Additionally, a New York Fed survey showed a drop in employment along with a surge in those looking for work. However, a combination of a gradual (rather than sharp) economic slowdown and looser monetary policy may indicate a longer economic cycle and a more supportive environment for risk assets. In other news, U.S. business activity fell slightly in August but remained firmly in expansion territory, according to the S&P Global flash PMI index. Average prices charged for goods and services rose at a slower rate as businesses reported customers pushing back against high prices. Retail giant Target saw its shares soar after reporting better-than-forecast earnings and revenue numbers, but the company struck a cautious tone on its outlook. New and existing home sales rose in July as buyers took advantage of falling mortgage rates.

Internationally, the yen gained ground after Bank of Japan Governor Ueda signaled a path to future rate hikes if prices continue to climb. Japan’s core CPI rose 2.7% YoY, an uptick from the prior month. Canada’s annual inflation rate cooled to 2.5%, keeping a September interest rate cut on track. The country’s top two railroads locked out more than 9,000 workers on Thursday, triggering a potential rail stoppage that could damage North American supply chains. However, the Canadian government stepped in to reduce tensions, and a back-to-work order may be forthcoming soon. Finally, business activity in Europe and the UK showed surprising strength this month, although the former continued to be somewhat hampered by Germany’s manufacturing downturn.

Current View

The stock market fell sharply yesterday as anxious and caution overtook a session that preceded one of the most consequential earnings reports with Nvidia’s quarterly results after the close. As if Nvidia’s report wouldn’t be enough, yesterday’s post-close earnings reports also included a leading Dow component, Salesforce, which is a major player in AI technology, and controversial CrowdStrike, releasing its first financial report since the global IT outage it caused. The tech sector fell about 1.5% on higher-than-average volume, resulting in a distribution day for the market. In the bond market, traders continue to price in lower interest rates. The 10-year Treasury yield is near its lowest levels of the year, at 3.84% late yesterday. The two-year Treasury yield, at 3.866%, is at the lowest since May 2023. In early morning trading today, the major indexes climbed even as influential artificial intelligence leader Nvidia fell following its earnings report. The market is solidly on track today to take-back yesterday’s losses. The participation in broadening and earnings and revenue growth, along with guidance, for the most part, have exceeded expectations. These factors have contributed to the current resilient market rally.

• Industry Group Strength:  BULLISH. As of yesterday, 147 out the 197 groups I monitor are up year-to-date. 50 are down.
• New Highs vs. New Lows: BULLISH. As of now, there were 227 new 52-week highs and 71 new 52-week lows.
• Dow Dividend Yield:  BEARISH. The current yield for the Dow Jones Industrial Average is 1.90%. The 10-year Treasury now 3.83%.
• Volatility Index:  NEUTRAL. Volatility has been volatile. The “VIX” is near 15. It is down from 16 two weeks ago. The index is also known as the “Fear Index.” It is considered a contrarian indicator and therefore viewed as bullish as it rises indicating investors are becoming more fearful. The VIX:

• Fear / Greed Index:  NEUTRAL.  Investors are driven by two emotions: fear and greed. Too much fear can create a condition of oversold/ undervalued stock prices. Too much greed can result in overbought/overvalued stock prices. The AAII Investor Sentiment Index is now neutral.   BE FEARFUL WHEN OTHERS ARE GREEDY. At 52, the Fear & Greed Index is up from 33 two weeks ago.

CLICK VIDEO FOR MORE ON THE “FEAR & GREED INDEX”

How CNNMoney’s Fear & Greed Index works

• Bull / Bear Barometer:  NEUTRAL. This secondary market indicator should also be viewed with a contrarian perspective. As of yesterday, according to the latest survey of stock market newsletter writers by Investor’s Intelligence (see below), bullish sentiment is 53.2%, up sharply from 44.6% two weeks ago. The bear sentiment is now 22.6%, about the same as 21.5% two weeks ago. This reflects a decrease in bullish and bearish sentiment over the last two weeks. Consider this a contrarian indicator because the crowd is often wrong at market tops and bottoms. In other words, extreme bullishness has been seen near several market tops in the past, while extreme bearishness has been seen at market bottoms.

• Put / Call Ratio: NEUTRAL. The ratio of put-to-call options is 0.85.  Near the same as 0.84 two weeks ago. The put-call ratio tracks the mood of what options investors are doing, not just saying. They typically buy puts if they think a stock will decline and calls if they think it will rise. If they’re buying lots of puts, they see the market declining. And if they’re loading up on calls, they’re generally bullish. Historically, market bottoms occurred when the reading spikes to 1.2 or more. Market tops are often made when the reading is 0.6 or less. Note how reliable this is with respect to the February record low coinciding with the market high. Keep in mind this is also a contrarian indicator.

Global Economic Indicators & Analysis:

POSITIVE INDICATORS

Revised Q2 GDP Shows Strength: The U.S. economy grew faster than initially thought in the second quarter amid strong consumer spending, while corporate profits rebounded, which should help to sustain the expansion. Gross domestic product increased at a 3.0% annualized rate last quarter, the Commerce Department’s Bureau of Economic Analysis said in its second estimate of second-quarter GDP this morning. That was an upward revision from the 2.8% rate reported last month. Consumer spending, which accounts for more than two-thirds of the economy, increased at an upwardly revised 2.9% rate. It was previously reported to have grown at a 2.3% pace. That offset downgrades in business investment, exports and private inventory investment.

Initial Jobless Claims Fall: Initial jobless claims fell by 2,000 to 231,000 in the week ended August 24, the Labor Department said this morning. Last week claims rose a revised 5,000 to 233,000. That compared with the initial estimate of a rise of 4,000 to 232,000. The four-week moving average of claims fell 4,750 to 231,500. That’s the lowest level since early June. The number of people already collecting jobless benefits in the week ended Aug. 17 rose by 13,000 to 1.868 million. The labor market has been softening, and Federal Reserve officials are watching it closely for any signs it is losing momentum. Economists say that firms are not hiring as quickly as in prior years, but layoffs have remained low. Economists expect a measured pace of cuts from the Fed in coming months beginning in September, but a rise in layoffs could lead to a quicker pace of easing.

Consumer Confidence Hits 6 Month High: The consumer-confidence index rose to 103.3 this month from a revised 101.9 in July, the Conference Board said Tuesday. That’s the highest reading since February. A measure that looks at how consumers feel about the economy right now improved to 134.4 in August from 133.1 in the prior month. A confidence gauge that looks ahead six months also rose, to 82.5 from 81.1. One key metric followed by economists showed increasing labor-market weakness. The labor-market differential — the share of respondents who report that jobs are plentiful minus the share who report that jobs are hard to get — fell to 16.4 in July from 17.1 in the prior month. The proportion of consumers predicting a recession was well below the 2023 peak. Economists say that confidence might have risen due to prospects of a rate cute from the Federal Reserve and the ebbing of inflation.

Case-Shiller Hit Another Record High: Home prices in the 20 biggest U.S. metropolitan areas set another record high in June but showed signs of a prolonged and gradual slowdown. The S&P CoreLogic Case-Shiller 20-city house-price index rose 0.4% in June compared with the previous month. Home prices in the 20 major U.S. metropolitan markets surveyed were up 6.5% in the 12 months ending in June. A broader measure of home prices, the national index, rose 0.2% in June and was also up 5.4% over the past year. All numbers are seasonally adjusted. The 20-city and national indexes are at an all-time high. Home prices continue to reach new heights, but the pace of appreciation has significantly slowed.

Durable Goods Orders Rise:  Orders at U.S. factories for long-lasting goods, such as new cars or machinery, jumped 9.9% in July, the Commerce Department said Monday. Orders have risen in five of the last six months. Excluding the volatile transportation sector, orders were up 0.2% in July after a 0.1% gain in the prior month. Another measure in the report seen as a bellwether for business investment — core capital-goods orders, which exclude volatile sectors like transportation and defense — slipped 0.1% last month after a 0.5% rise in June. Shipments of core goods, which are factored into GDP, fell 0.4% in July. Business investment has fallen 1.4% over the past year. Activity has been treading water due to high financing costs and uncertainty over future trade policies. Hopes of a rebound in the sector this year have faded but a likely Federal Reserve rate cut could begin to rekindle activity.

Fed Chair Powell Prepared To Cut Rates: Federal Reserve Chair Jerome Powell’s speech in Jackson Hole leaned dovish as he stressed the central bank does not want to see further weakness in the labor market. “The cooling in labor market conditions is unmistakable,” Powell said, in his Jackson Hole speech. “The time has come for policy to adjust. The direction of travel is clear.” The Federal Reserve is about to embark on a path of rate cuts, with the timing and pace of easing to depend, in part, on the economic data.

Home Sales Rise: Home sales rose for the first time in five months as an increasing number of listings drew some buyers into the market. Sales of previously owned homes rose 1.3% to an annual rate of 3.95 million in July. That’s the number of homes that would be sold over an entire year if sales took place at the same rate in every month as they did in July. The numbers are seasonally adjusted. Without seasonal adjustment, existing-home sales rose by 3.5%. Compared with July 2023, home sales are down 2.5%. The median price for an existing home in July rose 4.2% to $422,600, as compared with the year before. That’s the highest price on record for the month of July. The total number of homes listed on the market in July rose 19.8% from last year, to 1.33 million units. There is a four-month supply of unsold inventory. Four to six months’ worth of unsold inventory is considered a balanced market. Home sales posted a relatively small gain in July, with buyers responding to an increase in housing inventory. Lower mortgage rates and a higher number of homes for sale are expected to spark sales activity in the housing market.

S&P Surveys Show Steady Growth: The U.S. economy grew at a steady clip in August, a pair of S&P surveys found, and indicated little threat of recession despite signs the labor market has cooled off more rapidly than previously believed. The first reading of the S&P U.S. services index of purchasing managers edged up to 55.2 in August, from 55.0 in the prior month. Numbers above 50 signal growth. The preliminary U.S. manufacturing PMI, however, fell to an eight-month low of 48.0 from 49.6, keeping it in negative territory. Manufacturers are a much smaller part of the economy these days and have been in a prolonged slump due to high interest rates and a shift in consumer spending patterns. Purchasing managers buy supplies for their companies. They buy more when times are good and less when the economy sours. The surveys are the first indicators each month of how well the U.S. economy is doing. The best news in the report may have been the smallest increase in prices since June 2020, another sign inflation is easing. Slowing inflation has put the Federal Reserve on course to cut interest rates next month. The economy isn’t producing as many jobs as the labor market cools off, but layoffs are still extremely low. Most businesses have enough demand to keep current workers and they are reluctant to lay anyone off after experiencing the worst labor shortage in modern times. The most recent S&P surveys show the economy continued to expand at a moderate pace toward the end of summer. The report showed few signs of impending recession.

FOMC Minutes Show Cuts Almost Certain: “Several” top Federal Reserve officials were ready to cut interest rates in July and most believed a reduction next month is justified in light of slowing inflation and a weakening jobs market, new documents show. Fed officials even said they would have supported a rate cut at the July meeting. Instead, the Fed unanimously opted to leave interest rates at a 24-year high to make sure inflation kept slowing. A growing worry at the Fed’s July meeting was a drop-off in hiring and a rising unemployment rate, both of which were seen as evidence of a deteriorating labor market. Many Fed officials also believed that monthly increases in U.S. jobs had been “overstated,” a suspicion that turned out to be true. With inflation slowing toward the Fed’s 2% annual goal, the bank has put greater weight on the health of the labor market in considering when to reduce high U.S. interest rates. The two reports show the labor market cooled off earlier and faster than Fed officials had believed, giving support to the view that the central bank should cut rates more aggressively to support the U.S. economy.

U.S. Job Creation Slashed: The U.S. added 818,000 fewer jobs from the spring of 2023 to the spring of 2024 than previously reported, signaling a turn for the worse in the labor market that could spur the Federal Reserve to cut interest rates more aggressively. The government’s revised estimate of employment growth showed the economy gained about 2.1 million jobs from April 2023 to March 2024. Originally, the increase in employment during that span was put at 2.9 million. The downward revision is the second largest ever.

U.S. Leading Economic Indicators Fall Again: The leading index for the economy fell 0.6% in July, the fifth straight monthly decline. The leading index is a gauge designed to show turning points in the economy, but has not worked well in the post-pandemic environment. The index had fallen for two straight years before briefly turning positive in February. A measure of coincident economic conditions was flat in July after increasing 0.2% in June. The economy has been slowing, raising concern again about a recession. Traders in derivatives markets seem to think the economy will need rapid Federal Reserve rate cuts to avoid a serious downturn.

U.S. Housing Starts Plummet: Construction of new homes fell 6.8% in July compared with the previous month, as builders scaled back new projects. Housing starts fell to a 1.24 million annual pace from 1.33 million in June. That’s how many houses would be built over an entire year if construction were to continue at the same rate each month as in July. Housing starts fell to the lowest level since May 2020. Outside of the pandemic, new-home construction was at its lowest level since March 2019. The pace of construction has been trending lower in recent months as builders grapple with higher financing costs to build, as well as elevated mortgage rates that have dampened home-buying activity. New-home construction is down 16% from a year ago. Housing starts are typically a volatile data series. But the data indicate that builders are scaling back as they sense weaker demand from buyers.

John J. Gardner, CFP®, CPM®, AIF®

Blackhawk Wealth Advisors, Inc.

3860 Blackhawk Rd. Ste. 160 Danville, CA. 94506

Phone: 888-985-PLAN · Email: jg@blackhawkwealthadvisors.com

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For my Market Monthly podcast, click on the link below. I provide a review of global stock market highlights over the past month and preview of the month ahead. Forward insights and perspectives are based on current financial market and economic trends with an emphasis on relevant developments in various areas from Fed policy to company earnings announcements.

Blackhawk Wealth Advisors is the parent corporation of Equity Research & Portfolio Evaluation and Blackhawk Asset Management. It’s Chief Investment Officer is John J. Gardner. John is a Certified Financial Planner (CFP®) and Certified Portfolio Manager (CPM®). As an AIF®, John is also an Accredited Investment Fiduciary.

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