Bloodbath Continues

What to do next after this week's selloff

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After the torrid rebound from August lows, the market hit an air pocket and sold off -4% for the week. September is known to be a negative month and so far this one is no different. If you’re wondering what to do next, check out our premium section for our updated market outlook.

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Today’s topics: Reasons for the selloff, new macro data, the struggling economy, 100% accurate recession signal, seasonality signals, what to do next.

Selloff Continues

The selloff that started on Tuesday continued through Friday, bringing SPX down -4% for the week. This is one of the worst weeks since 2023 and one of the worst starts for September in the last century. As you’ll see in the macro section, the selloff was driven by deteriorating jobs data and hawkish Fed speakers. Additionally, the Yen carry trade and short volatility trade continued to unwind. All this happening against the backdrop of a low-liquidity seasonal period.

Sector-wise, defensives like Staples, Utilities, Real Estate, and Low Volatility outperformed cyclical sectors this week. At the same time, Tech and Semiconductors including NVDA underperformed heavily. That tells us a tech rotation and a defensive rotation are happening simultaneously. We previously cautioned that the market is in a defensive mindset but this headwind does not seem to be over yet.

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Recommended Read: NASDUCK

For a second opinion on what to make of Nasdaq and technology performance this week, check out NASDUCK’s comprehensive market analysis. Click here.

Big macro week

Lately the market has been reacting sharply to new econ data. Investors are uncertain about the future economic path, particularly whether or not there will be a recession. We maintain there won’t be, but it’s still early to call definitively. As traders, this kind of environment requires us to withstand whipsaw and not be too reactive to large daily moves or singular events. Wait for extra confirmation to avoid whipsaw.

This week we had the job openings survey, payrolls, and unemployment rate. Each one weakened to below pre-pandemic levels, though not drastically different from the prior decade. It is clear the labor market is cooling, and the market reacted strongly to Friday’s payrolls figure. We don’t think the story materially worsened from last month, and as we’ve written before, measurement issues make us skeptical of the data. Either way, this emboldens the Fed to cut rates which should stimulate growth.

Manufacturing activity continued to be weak, offset by decent services activity. The latter is more important given manufacturing only makes up 7% of all jobs. The Fed’s Beige Book, which reports on current econ conditions across the 12 Fed districts, reported flat/declining activity. Employment levels were flat to up slightly, with layoffs still rare. Big picture: hiring is slowing, but employers are hesitant to fire employees because of worker shortages.

Several Fed members spoke on Friday and the tone was hawkish – a risk we have called out before. Standout comments were:

• “unemployment rate is still low”

• “not there yet on 2% inflation”

• “not ready to say how big the first cut should be”

• “let’s not overreact to any data point including the latest data”

Governor Waller emphasized the word “carefully” and made it clear we’re not in a recession nor are we headed for one soon. Market odds of a 50bp rate cut fell sharply to 25% (versus 75% chance of a 25bp cut). This likely contributed to the Friday selloff.

The struggling economy

Dollar Tree (DLTR) and Dollar General (DG) stock have gotten absolutely crushed this week due to abysmal outlooks. They predominantly serve low-income households that earn less than $35,000 per year. This cohort continues to struggle from inflation and have had to sacrifice on purchasing basic necessities amidst rising living costs and tapped out credit cards.

From speaking with randoms on the internet, I’ve noticed people get furious if you claim “inflation is tamed” (which has been our view for a while now). The public experiences inflation as a price level, whereas Economists and The Fed talk about inflation as a rate of change. As an analogy, say I started last year weighing 100 pounds, then gained 50 pounds. This year I only gained 2 pounds. The Fed would say, “job done!” except I’m at 152 pounds, a lot heavier than I started.

Regular people are really struggling as prices are 25-50% higher than where they used to be. Wealthier cohorts are handling it better because financial assets are up double digits. That’s created the most division this country has seen in a long time. It’s going to result in political shifts, populist sentiment, anti-trust lawsuits, and “eat the rich” mentality. Sign of the times.

Yield Curve Dis-inversion

This week the yield curve dis-inverted, signaling the beginning of a recession…

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