WEEKLY INSIGHTS

September 9, 2024
Download PDF

Key Takeaways:

  • September is historically the weakest month of the year for equity returns.
  • Fed to cut rates by 25 bps but growth expectations may concern investors.
  • Fed should not ignore recent inflation data.
  • Investors may be pulling money to bonds before rate cuts.
  • We expect more downside ahead.

Is the “September Effect” Already Taking Hold in Equity Markets

Going back to 1945, September has historically been the worst month of the year for equity returns. The S&P 500 declines, on average, ~1.0% and has only been positive 44% of the time. If last week was any indication, the negative “September Effect” may already be taking hold in the markets. There are many different opinions/theories on why this takes place, including money managers coming back from vacations, investors locking in gains before year end, and an increase in bond issuance. It is important for investors to realize, the ”September Effect” is a theory not a fact. In this weekly insights we address the risks that we see this month that may contribute to the “September Effect” assumption.

  • The tone of the Fed meeting: The employment report we received last week suggested a slowing labor market but not slowing enough to justify a 50-bps rate cut at the next meeting. What will be important at the meeting is the Fed’s comments on future actions. In addition, we will receive updated dot plots, and estimates for GDP, employment and inflation. Last week we received the Fed’s Beige Book which is a report on the
    current economic conditions in the 12 Federal Reserve Districts. There were nine districts that reported growth as flat or declining (up from five in the past report). If this negative outlook for growth is reflected in the Fed’s official forecasts, this can fuel the hard landing scenario for the economy.
  • Will inflation derail Fed hopes? The only major economic data that we will get before the Fed meeting on Sept. 17/18th is on inflation. The Fed needs to be conscious of some of the recent inflation data we have seen. Average hourly earnings rose more than expected last week. The prices paid component in both the ISM Services and ISM Manufacturing Index moved higher in August. We are not saying we are in for an inflation scare but if any of the inflation data is hotter than expected that could limit the Fed’s flexibility.
  • Record bond issuance last week: According to data compiled by Bloomberg, Tuesday, September 3rd, 2024, was the busiest single sales day (by number of issuers) for the corporate bond market on record.1 It was the third-busiest
    day by dollar volume on record
    ($43.3 bn). The high volume of issuance comes as investors are looking to lock in higher yielding securities before the Fed cuts rates. This may be pulling capital from equity markets to bonds.
  • Budget deficit back in focus. The Federal government’s fiscal year ends at the end of September and the deficit is expected to climb to $1.9 trillion. While the debt ceiling has been suspended until early 2025, the debate around the fiscal health in the U.S. should increase.

The Bottom Line: While history can be a guide, it is not an overriding factor when it comes to investing. Instead, we are focused on the macro outlook and what is priced into the market. While the S&P 500 posted its worst one week decline since March 2023 last week, we are concerned there is more downside ahead. The economy is weakening quickly, the Fed may not have as much flexibility as investors are expecting and we have not seen earnings revised lower to reflect the economic weakness.

Your Economic and Market Detailed Recaps

Key Takeaways:

  • Manufacturing remains in contraction territory.
  • Service sector resilient.
  • Labor market cooling further.
  • Global equities fall sharply on growth scare.
  • Bond yields fall on growth fears.
  • Commodities drop led by oil.

Weekly Economic Recap — Labor Market Cools Further

The ISM Manufacturing Index rose modestly in August but has been in contraction territory (a level below 50) for 21 out of the past 22 months. Nearly every category remains in contraction territory. However, prices paid jumped for the second consecutive month.

The number of job openings in the U.S. dropped to the lowest level since January 2021. There are now ~550K more job openings than those looking for work. This is well below the peak of over 6 million job openings reached in March 2022.

The ISM Services Index was relatively unchanged in August and remains in expansion territory. Sharp declines in the backlog of orders, inventory sentiment and export orders overshadowed strength in delivery times and prices paid.

The U.S. economy added 142K jobs in August which was weaker than anticipated (estimate was 165K). In addition, the prior two months were revised lower by 86K jobs. The unemployment rate ticked modestly lower (from 4.3% to 4.2%) due to a reversal of temporary layoffs. Average hourly earnings rose more than expected on an annual basis (3.8% compared to 3.7% estimate).

Weekly Market Recap — Global Equities Fall Sharply on Growth Concerns

Equities: The MSCI AC World Index posted its worst one week of performance since September 2022 as soft economic data has investors concerned the Fed may be behind the curve in cutting rates. The U.S. led the global weakness specifically in small cap stocks and the technology and growth sectors.

Fixed Income: The Bloomberg Barclays Aggregate Index posted its best one-week gain in five weeks. Weak economic growth is pushing bond yields lower. Every major fixed income sector we monitor rallied for the week, but the gains were led by Treasuries and investment-grade credit.

Commodities/FX: The Bloomberg Commodity Index dropped for the second consecutive week and posted its worst one week decline in two months. Every major commodity sector declined with the exception of grains. Crude oil saw the worst of the declines as concern about weakening demand overshadowed OPEC’s decision to not increase production.


Futures Market is Pricing in Aggressive Rate Cuts

september


Data is as of September 6, 2024.
Source: Bloomberg Finance LP, Verdence Capital Advisors.

: https://www.bloomberg.com/news/articles/2024-09-03/corporations-stampede-into-bond-market-in-busiest-day-on-record?srnd=homepage-americas

Disclaimer: © 2024 Authored by Megan Horneman, Chief Investment Officer, Verdence Capital Advisors, LLC

Reproduction without permission is not permitted. The indexes presented are unmanaged portfolios of specified securities and do not reflect any initial or ongoing expenses nor can it be invested in directly. An investment’s portfolio may differ significantly from the securities in the index.  This material was prepared by Verdence Capital Advisors, LLC (“VCA” or “we”, “our”, “us”). VCA believes the information and data in this document were obtained from sources considered reliable and correct and cannot guarantee either their accuracy or completeness. VCA has not independently verified third-party sourced information and data. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. This material is being provided for informational purposes only and is not intended to provide, and should not be relied upon for, investment, accounting, legal, or tax advice. Past performance is not a guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly in these materials will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. You should not assume that any discussion or information contained in this report serves as the receipt of, or as a substitute for, personalized investment advice from VCA. Alternative investments are designed only for sophisticated investors who are able to bear the risk of the loss of their entire investment. Investing in alternative investments should be viewed as illiquid and generally not readily marketable or transferable. Investors should be prepared to bear the financial risks of investing in an alternative investment for an indefinite period of time. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses. Sector Watch Use of this website is intended for U.S. residents only. Any recommendation, opinion or advice regarding securities or markets contained in such material does not reflect the views of Verdence Capital, and Verdence Capital does not verify any information included in such material. Verdence Capital assumes no responsibility for any fact, recommendation, opinion, or advice contained in any such research material and expressly disclaims any responsibility for any decisions or for the suitability of any security or transaction based on it. Any decisions you may make to buy, sell, or hold a security based on this research will be entirely your own and not in any way deemed to be endorsed or influenced by or attributed to Verdence Capital. It is understood that, without exception, any order based on such research that is placed for execution is and will be treated as an UNRECOMMENDED AND UNSOLICITED ORDER. Further, Verdence Capital assumes no responsibility for the accuracy, completeness, or timeliness of any such research or for updating such research, which is subject to change without notice at any time. Verdence Capital does not provide tax, or legal advice. Under no circumstance is the information contained within this research to be used or considered as an offer to sell or a solicitation of an offer to buy any particular investment/security. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk. Commodity‐related products, including futures, carry a high level of risk and are not suitable for all investors. Commodity‐related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held. Data is provided for information purposes only and is not intended for trading purposes. Verdence Capital shall not be liable for any errors or delay in the content, or for any action taken in reliance on any content. Weekly Insights/Qtrly & Annual Outlook The indexes presented are unmanaged portfolios of specified securities and do not reflect any initial or ongoing expenses nor can it be invested in directly. An investment’s portfolio may differ significantly from the securities in the index. Semi-Annual Chart Pack Where shown, performance information presented is that which has been calculated and presented by an unaffiliated third-party manager. We have no insight into the performance of the advisor/product/account or fund shown and do not attempt to determine whether the performance presented is accurate. Therefore, the performance could be incorrect, overstated or not reflective of actual trading of client funds. There is the potential that the performance shown is a back test and not the result of real investment advice and trading. As such, it could not be relied upon as indicative of future returns of a particular strategy. Where performance shown is that of a pooled account, limited partnership, or private equity fund, you should be aware that there is a significant lack of transparency into the operations and investment process and investment vehicles invested in. As a result, pricing and valuation of the underlying holdings which produced the stated performance could be incorrect, stale, or overstated and therefore the performance figures presented cannot be relied upon. Before investing, we encourage you to request additional information, particularly performance information, of any product that you are considering for your client. You should read, as applicable, the Prospectus, SAI, Composite Disclosure and/or performance disclosure associated with any product that you are considering for investment for your or your client’s. Products shown may have minimum account sizes or minimum investments which may preclude retail and non-high net worth investors from being able to invest in these products. You should be aware that certain LPs may be closed to new investors and therefore your clients may be prevented from investing in these products. Portfolio Implementation and Rationales The SMA Asset Allocation Models do not represent a personalized recommendation of a particular investment strategy to you or your clients. You should not buy or sell an investment without first considering whether it is appropriate for your client’s portfolio. Additionally, you should review and consider any recent market news. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. Diversification and asset allocation do not ensure a profit and do not protect against losses in declining markets. Any forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. Investments in growth stocks may experience price volatility due to their sensitivity to market fluctuations and dependence on future earnings expectations. Sector allocation references to market capitalization (“smid cap” or “micro caps” etc.) may be subject to special risks given their characteristic narrow markets, limited financial resources, and less liquid stocks, all of which may cause price volatility. International/global investing can involve special risks, such as political changes and currency fluctuations. These risks are heightened in emerging markets. A significant percentage of the underlying investments in aggressive asset allocation portfolio investments have a higher-than-average risk exposure. You should consider your risk tolerance of each of your clients carefully before choosing such a strategy. An investment with multiple underlying investments (which may include asset-allocation or custom blended investments) may be subject to the expenses of those underlying investments in addition to those of the investment itself. Investments may reside in the specialty category due to 1) allowable investment flexibility that precludes classification in standard asset categories and/or 2) investment concentration in a limited group of securities or industry sectors. Investments in this category may be more volatile than less flexible and/or less concentrated investments and may be appropriate as only a minor component in an investor’s overall portfolio. Investment Managers You and your clients should carefully consider investment objectives, risks, charges, and expenses of Funds discussed. This and other important information are contained in the respective Fund prospectuses and summary prospectuses, which should be read carefully before investing. Investment portfolio statistics change over time. Current performance may be lower or higher than return data quoted herein. The investment return and the principal value of an investment will fluctuate; so, an investor’s shares/units, when redeemed, may be worth more or less than their original cost. Verdence relies heavily on unaudited third-party data. Data sources include public data, such as mutual fund data, and non-public data, such as information provided by other investment advisors and managers of limited partnership pooled accounts. Data and/or statistics included on this Portal, including references to performance, opinions, ratings, rankings, manager statistics and demographic information, product, or strategy descriptions, either quantitative or qualitative, are based upon information reasonably available to us as of the applicable date(s) then-published. Information has been obtained from sources that we believe to be reliable, but these sources cannot be guaranteed as to their accuracy or completeness. All data and information produced by a third party has the potential to be incorrect, incomplete, or otherwise misleading. No implication shall be created that the information contained on the Site is correct, including as of any time subsequent to the publish date, and Verdence does not undertake an obligation to update such information at any time after such date. Verdence makes not warranty or representation of the veracity of the data and information and its use of the information should not be implied as an endorsement of any material or statements made. Data, particularly non-public data, is subject to error and where the information is not audited, the potential for error is greater. Where shown, performance information presented is that which has been calculated and presented by an unaffiliated third-party manager. We have no insight into the performance of the advisor/product/account or fund shown and do not attempt to determine whether the performance presented is accurate. Therefore, the performance could be incorrect, overstated or not reflective of actual trading of client funds. There is the potential that the performance shown is a back test and not the result of real investment advice and trading. As such, it could not be relied upon as indicative of future returns of a particular strategy. Where performance shown is that of a pooled account, limited partnership, or private equity fund, you should be aware that there is a significant lack of transparency into the operations and investment process and investment vehicles invested in. As a result, pricing and valuation of the underlying holdings which produced the stated performance could be incorrect, stale, or overstated and therefore the performance figures presented cannot be relied upon. Before investing, we encourage you to request additional information, particularly performance information, of any product that you are considering for your client. You should read, as applicable, the Prospectus, SAI, Composite Disclosure and/or performance disclosure associated with any product that you are considering for investment for your or your client’s. Certain products shown may have account minimums or minimum investment sizes that are unattainable for your clients and therefore they may not be eligible to invest in these products. Reference to registration with the Securities and Exchange Commission (“SEC”) does not imply that the SEC has endorsed or approved the qualifications of Verdence or its respective representatives to provide any advisory services described on the Site.

Read more