August was characterized as a normal period of consolidation, capped by a strong reversal of the trend in the last week of the month. The softer economic data fueling the bullish pivot essentially took the chance of a Fed rate hike at the September FOMC meeting, off the table and, from my perspective, there is now a growing likelihood they are done raising rates, assuming this week’s inflation data comes in fairly mild.
The tech sector was rattled by news of the Chinese government restricting sales of Apple iPhones to their government workers, which impacted Apple shares, shedding some $200 billion from that stock’s valuation. Some see this as a furthering of the tech war between the U.S. and China, but what it also may do is advance technology at an even faster pace by increasing this competition for global leadership.
According to FactSet, for Q2 2023 (with over 99% of S&P 500 companies having already reported actual results), 79% of S&P 500 companies reported a positive earnings per share (EPS) surprise, and 64% of S&P 500 companies have reported a positive revenue surprise. This is a pretty good report card for the S&P.
From the most recent economic data, it appears that the economy is indeed slowing, but not so much as to risk a recession. The market has bought into this narrative. I believe this week will see the market look to extend the rally into the second half of the month. This marks the end of the third quarter, when fund managers tend to window-dress their portfolios to reflect market conditions.
Looking ahead for market catalysts this week, the August CPI will be released tomorrow, with consensus forecasts of a 0.6% rise, with Core CPI (ex-food and energy) slated at 0.3%. The higher headline reflects a rebound in gasoline, diesel, and jet fuel prices, plus some food items. The key components to consider will be shelter and professional services, both of which have shown signs of softness recently.
One thing that is glaringly obvious in current market price action is how the bond market has its fingers on the scales of the short-term direction for equity markets. Most investors agree that stock indexes trend higher 80% of the time. It’s that 20% down-time that can prove to be gut wrenching and shake investors out as they tend to be defined by sharp, nasty pullbacks that erase months-long gains in a matter of days.
Given the pullback in most of the Magnificent Seven stocks that rule the index weightings, the S&P 500 has resolved to find support in the energy sector, and not so surprisingly, the utility sector, that has been crushed from the sequential rate hikes. If fund managers are starting to accumulate utility stocks at depressed levels, they are anticipating locking in the highest dividend yields offered by the sector in nearly three years, with the idea that bond yields have peaked. A canary in the coal mine? Maybe.
The biggest reason energy stocks move higher is because of the base case that the global economy won’t falter and will instead exhibit resilience, along with bullish production cuts by OPEC+ and any new anticipated stimulus by the Chinese government. There has been widespread breakout price action by the E&P, integrated, oil service, and refining stocks of late. Barring a negative geopolitical catalyst, it is a leading indicator for the rest of the market when energy rallies. For all intents and purposes, we’ll take it!
I think the setup for a strong finish to September, that ushers in the third-quarter earnings season, is well-founded, based on friendly economic data, a bullish change in macro-economic sentiment and the friendly mix of a Fed pause and fourth-quarter seasonality. And if there is a reacceleration of IT spending, it may push the other big tech stocks that dominate the S&P to new all-time highs.
My thoughts are the moment big money senses that the 5%+ short-term rates will begin to trend lower, there should be a tsunami of cash pouring back into big-cap dividend stocks that tend to outperform in the early stages of rate easing. For income investors, it will be a golden point in time to shift away from short-term instruments and consider blue-chip dividend stocks that have the potential to produce double-digit returns.
