Market Update Week 39

Gordon Achtermann |
Categories
Investing

Market Recap

Week of Sep. 23 through Sep. 27

  • Consumer confidence fell to 98.7, down from 105.6. My personal opinion is that this reflects the noise machine of intense political campaigning where one side is trying to convince us that America is a failing country - despite having the strongest and most diversified (i.e., resilient) economy in the world. 
  • Headline and core PCE (Personal Consumption Expenditures) rose 2.2% and 2.7% y/y, respectively. And the core rate was up only 0.10% from last month. 

The Week Ahead

  • The first look at September employment data
  • PMI (Purchasing Manager's Index: summarizes economic activity in the manufacturing and services sectors. The PMI is based on surveys of executives in the private sector. A PMI above 50 indicates an expansion, while a PMI below 50 indicates a contraction.) Most recently, it was 51.50.

Charts and Comments

Style box and sectors

 

 

 

 

 

 

 

 

 

 

 

 

Key: V=Value, B=Blend, G=Growth, L=Large-cap, M=Mid-cap, S=Small-cap

My first observation this week is that Large-cap Growth continues to outperform the rest of the market, despite small-caps making a little noise earlier this year. I don't see how you can make good returns in small caps without a mechanism for filtering out the many lower-quality companies in a group of 2000.

Second, Energy continues to be a laggard (it was the second-worst sector and essentially flat in 2023.) This means that broad  ESG funds, which typically own few fossil-fuel companies, have a chance to do well.

JPMorgan Weekly market data

 

Note that while bonds overall have still not recovered from their worst year ever (2022), high yields, bonds rated lower than BBB, are up 9.27 over 3 years. That's nothing to write home about, but at least it's better than small-caps (Russell 2000 up 1.84% over 3 years) and Emerging Markets (up 1.9% over the same period).

yield curve data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JP Morgan's commentary on this chart:

After 26 months of inversion, the yield curve, measured by the spread between the 2-year and 10-year Treasuries, has returned to its normal upward-sloping form. Since the July Jobs report, the curve has bull-steepened**, meaning the 2-year yield has fallen faster than the 10-year yield, causing it to un-invert earlier this month. The Federal Reserve’s recent 50 basis point cut accentuated this move, albeit in a slightly different manner. 

Since the September FOMC meeting, the 2-year yield has fallen 6 bps, maintaining its downward momentum, while the 10-year yield has risen 5 bps. This suggests policy expectations have turned modestly more dovish, but fears of an economic slowdown have somewhat eased. Although the belly of the curve has normalized, the 3-month T-Bill still offers a higher yield than the 10-year and will likely continue to do so until the Fed cuts rates further. 

While an inverted yield curve is often considered a recession indicator, it’s the un-inversion that has historically signaled an impending downturn. In fact, prior to the last 4 recessions, the yield curve regained its positive slope after an extended period of inversion. However, this may be more coincidental than predictive, and we don’t think the U.S. economy is on the brink of recession today. Each of these prior recessions was born from either economic bubbles, unforeseen external shocks for which the yield curve would possess little predictive power, or a combination of both. While the upcoming U.S. election and elevated geopolitical tensions continue to loom over the current expansion, the cyclical sectors of the economy don’t look overextended. Despite recent shifts in the yield curve, the risk of some endogenous shock sparking a recession is low, and resilient consumer spending should support trend-like economic growth into 2025.

** Bear-steepening would be when the curve's change is due to a rise in the long-term rates side of the curve.

Sources: JP Morgan

 

All the Best,
Gordon Achtermann, CSRIC®, MBA, CFP®

Gordon@yourbestpathfp.com
703-573-7325


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