CWS Market Review – August 20, 2024
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“All money is a matter of belief.” – Adam Smith
Today, the stock market snapped its eight-day winning streak. Frankly, the loss was small potatoes, just 0.20%, but I was hoping for another up day, and not just for wealth’s sake, but because the S&P 500 hasn’t rattled off a nine-day streak in nearly 20 years.
Honestly, Wall Street is pretty quiet right now. The volatility index has settled back to the complacent zone, and much of the financial world has zoomed off to the Hamptons or Martha’s Vineyard. At least, the fat cats have. The last two weeks before Labor Day are usually sedate on Wall Street.
The big event on everyone’s mind right now is the Fed’s annual conference in Jackson Hole, WY. In previous years, the Fed has used the Jackson Hole conference to announce major policy changes. In fact, it was at Jackson Hole two years ago that Fed Chairman Jerome Powell made it clear that he intended to crush inflation.
I doubt we’ll see anything so dramatic this time. This year’s conference is titled “Reassessing the Effectiveness and Transmission of Monetary Policy.” (Yawn!)
Chairman Powell is scheduled to speak on Friday morning. I assume he’ll preemptively justify the case for a 0.25% rate cut at the September FOMC meeting. I’m imagine he’ll be vague about plans after that.
Traders see the Fed lowering rates by 100 basis points before the end of the year. That’s a bold outlook. It implies that the Fed will cut by 50 basis points at the November or December meeting. Traders see the Fed cutting by another 100 points within the first seven months of 2025.
The stock market has rebounded impressively from its downdraft last month. In retrospect, the August swoon appears to be quite silly. Traders were panicking over mostly sideshow issues like the carry trade. The Q2 earnings season was mostly good for corporate America.
The S&P 500 is getting close to a new all-time high. In fact, if we were to exclude the Magnificent 7, then the index —the S&P 493— would already be at an all-time high. The hitch is that the losses in the Mag 7 reflect the tremendous sector rotation we’ve seen.
I want to discuss that in a little more depth because in my mind, that’s been the big story. What happened is that growth stocks were crushing value stocks until early July. Once the stock market peaked in mid-July, investors rushed out of growth stocks while value stocks largely sidestepped the damage. That’s the role of value stocks: provide a safe haven when everyone else gets rattled. All told, the selloff wiped off $6.4 trillion in market value.
The rotation was relentless but brief. In a few days, the market unwound the pro-growth undercurrent of the previous three months. The S&P 500 eventually hit bottom on August 5. Since then, the stock market has regained a lot of lost ground.
Here’s where it gets interesting. Growth has indeed led value in this latest rally but it’s nowhere close to the degree of the previous sector rotation.
Think of the rotation this way. The stock market has gone from Trend X to very strongly anti-X and now back to a watered-down X. I suspect that many investors are conflating this watered down X with the original trend. It’s not. It’s not even close.
Here’s a chart showing the S&P 500 Growth ETF (SPYG) divided by the S&P 500 Value ETF (SPYV). That’s the black line. I’ve also included the S&P 500 ETF (SPY) in green so you can see what the overall market was doing.
You can see that growth is leading value, but that’s after growth was demolished in July and August.
In this case, I’ve used growth and value, but you can use one of several different charts like Nasdaq versus Russell 2000 or S&P 500 equal weight versus not equal weight. They all show the same effect, Wall Street’s changing tolerance for risk. In turn, that’s related to the Fed’s outlook for interest rates. To quote from Lester Freamon, “all the pieces matter.”
I think the move to value stocks is far from over, but it may not be as dramatic as it was earlier this summer. There’s still a lot of uncertainty in this market.
Lowe’s Cuts Guidance
Speaking of which, I like to watch what big retailers have to say because that can often be a good bellwether for the overall economy.
On Tuesday, Lowe’s (LOW) said that it beat its Q2 earnings estimate ($4.10 vs. $3.97), but that was about the only good news. The home improvement company missed on sales expectations ($23.59 billion vs. $23.91 billion), and it lowered its full-year outlook. Lowe’s is not alone. Last week, Home Depot (HD) lowered its outlook for the second half of this year.
Previously, Lowe’s said it was expecting full-year revenues of $84 billion to $85 billion. Now it dropped that to a range of $82.7 billion to $83.2 billion. The company expects comparable store sales to fall by 3.5 to 4%. That’s down from the prior forecast for a decline of 2% to 3%. Lowe’s made $4.56 per share for the same quarter one year ago.
What’s going on? The CEO said shoppers are waiting for the Fed to lower rates. While that may be true, I’m always a bit skeptical when management says outside forces are to blame. Comparable sales fell by 5.1% last quarter.
There are some key differences between the business models of Home Depot and Lowe’s. For example, HD gets a larger share of professionals. About half of HD’s sales are to home professionals while it’s only 25% for Lowe’s.
Lowe’s is just one data point. Last week, Walmart posted good earnings and raised guidance. Goldman Sachs recently raised its odds for a recession from 15% to 25%, and now it’s lowered the odds to 20%.
Tomorrow Is Benchmark Revision Day!
Let me warn you. Tomorrow morning, about one million American jobs will disappear in an instant. Well, let me be a little more accurate—the government’s official count of American jobs will be lowered by a lot.
This is the time of year when the government bean-counters issue their preliminary benchmark jobs revision. This is real technical stuff, but this year, the revision will likely show that job growth has been weaker than originally reported. It could be by a lot.
There’s no need to panic because the time period has long since passed. The revision covers the 12 months through March. The BLS originally said that nearly three million jobs were created in those 12 months. Even after a big revision, jobs growth was going well.
Wall Street has no idea what the revision will be. Goldman and Wells Fargo said the revision will be by 600,000 jobs. It’s all just a guess. JPMorgan said it will be by 360,000. Goldman said it could be as high as one million.
Here’s how Bloomberg describes the revision:
Once a year, the BLS benchmarks the March payrolls level to a more accurate but less timely data source called the Quarterly Census of Employment and Wages, which is based on state unemployment insurance tax records and covers nearly all US jobs. The release of the latest QCEW report in June already hinted at weaker payroll gains last year.
The revision will tell us how robust the jobs recovery was. Since this is an election year, it will certainly get some attention. (And no. No one “cooked the books.”) As to what the Fed is planning, the revision is largely irrelevant.
There’s more to look forward to this week. Of course, Jerome Powell will be speaking at 10 am ET on Friday morning. Tomorrow, the Fed will release the minutes of its most recent meeting. On Thursday, we’ll get the last initial claims report and the report on existing-home sales. That’s all for now. I’ll have more for you in the next issue of CWS Market Review.
– Eddy
Posted by Eddy Elfenbein on August 20th, 2024 at 6:16 pm
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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