· Stocks stumbled this past week as worries over inflation reemerged as a result of a stronger than expected Service Report from the Institute for Supply Management and continued strength in the labor market as represented by Initial Claims for Unemployment Benefits. We wouldn’t make too much of it as we have noted several times that August, September and the first half of October are historically weak periods for equities. With this in mind, we would expect the choppiness to continue over this period.
· Speaking before the Dallas Business Club this past Thursday, Dallas Fed President Lorie Logan noted that her base case in regard to inflation is that “there is more work left to do” and that “after the unacceptably rapid increases of the past several years, I’m not yet convinced that we’ve extinguished excess inflation.” In regard to its upcoming regularly scheduled meeting of the Federal Reserve’s Open Market Committee meeting September 19-20, Logan stated that “another skip [in interest rate hikes] could be appropriate” but that “skipping does not imply stopping.”
· According to data from the U.S. Treasury department and research from Apollo, 31% of All U.S. Government Debt Outstanding Matures within the next year. All things equal, as this debt matures it will have to be replaced by higher interest paying securities and more of them as the U.S. deficit has increased. The combination of higher interest rates along with added supply means that a larger percentage of the federal budget must go to servicing that debt.
· According to Morningstar, at the current time the 10-year U.S. Treasury Note is on pace to provide investors with a negative total return (bond price depreciation offset by the interest from the note) for the third consecutive year, the first time this has occurred in 250 years.
· Saudi Arabia, head of the Organization of the Petroleum Exporting Countries (OPEC), and Russia (OPEC+) will extend their oil production cuts through the end of the year, squeezing supply by a deeper-than-expected amount amid rising global demand. The markets had anticipated a one-month extension. This, along with the replenishment of the U.S. Strategic Petroleum Reserve should put a floor under oil prices.
· Apple falls on report that China restricted iPhone use for its government officials, this according to the Wall Street Journal. The iPhone is the only device not scannable by their spying tool distributed to every police. Banning it will make every phone in China scannable, thus allowing the CCP to monitor virtually all communication within the country. Moreover, it would make the average Chineses consumer less likely to purchase the device.
· The death of “king dollar” has been greatly exaggerated as the U.S. currency has rallied for eight consecutive weeks against the Euro and thus far this year, according to Bespoke, “on average across 29 different pairs, local FX [currency] has dropped 293 bps [basis points] versus the dollar this year.”
This rally in the dollar comes amidst some ill-placed concern by some that the rise of the BRIC countries will take down the dollar. Suffice it to say that both Xi Jinping and Vladimir Putin, both of whom did not attend the regular gathering of the G-20 in India this past week, have their own issues to worry about.
· As the concern over inflation becoming embedded in the economy linger, investors will keep a close eye on the release of the Consumer and Producer Price Indexes Wednesday and Thursday which measure inflation at the retail and wholesale levels. We believe that core inflation (ex- food and energy) will remain elevated, keeping investors on edge during this seasonably weak period. But not to worry as…
· Along with others, the financial media creates both the greed and fear in investors that tend to hurt their ability to focus on the long-term, defined historically as one with a great degree of predictability. The above is evident in an item at the top of our Google feed entitled “Far deeper market losses will emerge’: A notorious market bear who called the 2000 and 2008 crashes warns the S&P500’s losses are only just beginning as stock valuations remain near their 1929 and 200 levels.” Unfortunately, in an effort, to gather clicks, the feed did not note that the individual creating the quote, John Hussman, is a notorious bear on the markets and has been so for decades. Furthermore, his flagship Hussman Strategic Growth Fund (HSGFX) has underperformed the S&P 500 by more than 25% thus far this year and by an average of more than ten percent per year over the past decade. The moral, be careful of who’s advice you heed.
· According to a survey from Bankrate and as reported by CNBC, “a majority of full-time workers and job seekers – 81% -- support a four-day work week versus a traditional five-day schedule. Of those workers, 89% said they would be willing to make sacrifices to work just four days.”
· We believe the Fed will not raise rates at its next regularly scheduled meeting September 19-20. We also believe that rates will stay in and around these levels (historically normal) for longer than was originally expected. As noted last week, the Fed has already used its mulligan on inflation when Chair Jerome Powell called it ‘transitory’ back in 2021 and therefore does not want to run the risk of being wrong again. This may in turn keep them more hawkish than the market is currently anticipating. That said, given the ten rate hikes since the first on March 17, 2022, totaling 5.50%, we believe we are at the point in the economic cycle where the Fed will be moving more cautiously, perhaps not at every meeting of the Open Market Committee (FOMC) and in increments of 0.25% as opposed to aggressively. The market can handle this. Fed action from this point forward in the economic cycle is more about messaging and signaling their hawkish intentions as opposed to providing a headwind or tailwind to short-term economic activity.”
· Don’t get sucked in by investing solely in short-term fixed income securities such as money markets, short-term bonds or Certificates of Deposit (CDs) despite their yields being higher than longer dated securities as a result of the inverted yield curve. With the interest on the 10-year U.S. Treasury hovering around 4%, we recommend laddering bonds in order to add predictability to your stream of future income.
· Corporate news – RH (RH), formerly Restoration Hardware fell sharply on Friday as, despite beating earnings estimates, the company provided a cautionary forward look. Oracle (ORCL) reports earnings after the closing bell on Monday. Schwab’s (SCHW) absorption of TD Ameritrade’s $1.3 trillion in assets spread across more than four million accounts went off without any major hitches this past week.
· Upcoming Economic Reports scheduled to be released this week include the following, on Wednesday, August Inflation at the retail level as measured by the Consumer Price Index (CPI); on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance, a measure of August Wholesale Inflation according to the Producer Price Index(PPI), August Retail Sales and July Business Inventories; and on Friday, a Preliminary Look at September Consumer Sentiment According to a Survey by the University of Michigan along with August Industrial Production and Capacity Utilization.
· Second quarter earnings season has begun to wind down. However, several notable companies will report earnings that will provide insight into the health of the economy. These include – Oracle (ORCL), Casey’s General Stores (CASY), Cracker Barrel (CBRL), Adobe (ADBE), Copart (CPRT) and Lennar (LEN).
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