Monthly Outlook: September 2023
Nearly every market remains in an uptrend this Labor Day. US Growth and Value, US Small, INTL, Emerging, Bonds, Commodities – they’re all trending higher. Everything is awesome, right? It feels like all news is good news, at least to markets. (We’ll discuss this later.) Most markets had a pullback in early August before recovering last week. Pullbacks of 5% are routine during uptrends and, so far, that’s all we had in August. Since markets are trending higher, we remain “all in” and positioned for growth.
Can All News Be Good News?
While we’re cautiously optimistic about markets, it’s also prudent to be professionally skeptical. The evidence that supports strong markets is more mixed than the price trends suggest. This summer, I’m sure we all noticed that airplanes are full, restaurants are busy, and people are shopping. The economy sure appears to be humming along. But we also know that the Federal Reserve has raised the Fed Funds interest rate from 0% to 5.25% over the last 18 months. That leads to higher rates for mortgages, car payments, and credit cards and it’s starting to take a toll on the economy. Inflation is coming down from the June 2022 peak of 9% to 4% today, but it’s still not back to the Fed’s 2% goal. We should expect tighter money (high rates) until their inflation goal is achieved.
Clearly, all news is not actually good news, so why does the market seem to act like it is today? The answer probably lies in understanding how markets work. Markets focus on expected results, looking ahead about 6-12 months. It’s not that the news or outlook is that great, but it’s less bad than it could be, and that’s reason enough to move higher. Earnings for the S&P500 have fallen from $200/share last year to $175/share today, but they’re “beating expectations” that were a bit lower. Good news! Interest rates have spiked from 0% to 5.25%, but with inflation on the decline, maybe rates have peaked, and we can expect flat or maybe even softening interest rates. Good news! Employment opportunities spiked after COVID, and they’ve leveled off lately. Some big banks and tech firms are laying off some workers. But the unemployment rate is still a low 3.5%, so people have jobs (and paychecks). Good news! You get the point: less bad news is good news. Stocks can move higher because a soft landing is possible, and Bonds can move higher because inflation is being tamed and rates will likely fall.
Three Indicators We’re Watching into Year End
We’re enjoying the gains from uptrends for now and willing to “let it ride” as long as we can. But it’s our job to stay vigilant and move from “make it” to “keep it” mode when the time comes. That could be in two months or two years, but it pays to prepare before you need to act. I’ll share three indicators that we’re watching carefully that would signal change.
The first indicator we’re focused on is the unemployment rate. It gets reported on the first Friday of every month. Today it’s at a low 3.5%. But if it rises to 3.6% or higher for two consecutive months, that would likely be an indicator of a coming recession and bear markets.
The second indicator we’re watching is the US Treasury 2yr-10yr inverted yield curve. Today the 2yr is 0.75% higher (inverted) than the 10yr rate. If the inversion reverts to 0.65% or less, that would likely indicate a coming recession and bear market, too. We should note that the 2yr-10yr yield curve has been inverted since July 2022. But it’s like saying the falling off a building (inversion) isn’t the problem, it’s the landing (un-inversion) that hurts. We’ll be watching for the un-inversion.
And third, we’ll watch the price trends of each market as always. We define the price trend using long- and medium-term moving averages. It’s a calculation, not a guess. As long as any market (or the index ETF that corresponds to a market) stays above its price trendline, we’ll stay fully invested for growth. When an ETF turns down and below its price trendline, we’ll sell it and lock in gains.
Today, nearly every market is above its price trendline, so we remain fully invested for growth. But the time to prepare for action is before you need to act. Most money managers buy & hold. We don’t. We stand ready and willing to sell downtrending markets to protect you from the big loss.