It Pays To Be Patient!

We made the right decision

Welcome back to MktContext! Improve your portfolio returns by demystifying the economy and seeing the market signals. We’ll show you how to time the stock market (yes, it’s possible!)

Our bullish view is proving to be correct. Despite the violent selloff in the first week of Sept, we made the decision to hold, and it’s now paying off. This is why we spend time deciphering the macro economy — our “no recession” call gave us conviction to hang tight.

What’s next from here? Our outlook on where the market is going next, in the premium section.

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Today’s topics: market review, inflation data, presidential debate, volatility signals, important chart patterns, where we're going NEXT.

Market performance

After falling -4% in one of the worst starts to September, the SPX and QQQ have clawed their way back to flat. This week’s trading was choppy, with SPX testing the $5400 support level (July demand zone, 100d moving average). The choppiness is why we advised waiting for confirmation and bar closes so you don’t get whipsawed. We remained fully invested and rode out the volatility, which turned out to be the correct call.

How did we know? Last week we discussed a possible VIX squeeze that caused the sudden selloff. This is a temporary position unwind that is not supported by fundamentals. The fundamentals, as we’ve been discussing ad nauseum, are okay. When liquidity returns to the market and cooler heads prevail, the market will be bought up.

DO NOT CHEER YET. Regular readers of MktContext know that volatility in election years run into late October. Historically when Sept starts badly, it also ends badly. But we have the start of a recovery; the market is repairing itself and now back to all-time highs. In the premium section we discuss where the market’s going next.

Macro data

The economy is cooling from feverish levels and in the process, is triggering recession indicators like the Sahm Rule and the dis-inversion of the yield curve. This creates a lot of debate on whether the economy is headed for a hard or soft landing — the title of our midweek note. It’s a classic “growth scare” and the market is rotating into defensive stocks because of it. Though we have long argued for the “no recession” case, we still need to respect the flows and not fight it — only wait for it to pass.

This week’s unemployment claims were as expected, with initial and continuing jobless claims remaining low. We’ve spilled a lot of ink on jobs data lately so won’t belabor the point, but the labor market’s message is still optimistic.

The big data point this week was inflation which came in slightly hotter than expected. Most of the increase was in shelter, airlines, and lodging — but we’ve heard commentary from airline and hotel companies, and it’s not inflationary. Meanwhile, shelter (housing) costs are notoriously lagged in CPI. The CFO of Blackstone said their own measure of inflation (adjusting for shelter) is 1.7%, not the 2.5% of headline CPI. Comfortably below the Fed’s target of 2%.

In fact, the service components of CPI are the only areas still rising — suggesting that wages are rising! As long as that’s the case, people will spend more which adds support to the economy.

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Presidential debate

I usually stay away from politics on this blog, but I’ll say one thing. Both sides of the aisle are in favor of fiscal support (tax cuts, tax credits, subsidies, or industrial policy). Fiscal spending provided a huge lift to the economy during the Covid era, and will continue to boost spending and investment. Indeed, a strong fiscal response is a reason the US recovered uniquely better than other developed economies. Bullish for markets.

You might be asking, “What about the huge government deficit?” Unfortunately that isn’t important in the near term, and deficit levels are in fact sustainable. Unless the market starts caring soon, there’s no point in hedging this risk.

Post the debate, markets appeared to price in higher odds of Harris winning. This is offset by odds of the Senate turning Republican, which limits policy changes. With both parties’ platforms well known to the market, we would expect there to be limited surprise from either side winning.

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Volatility improving

As noted in last week’s article, in order for the market to recover, we want to see VIX…

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• Technical patterns leading the way

• Where the market is going next

• Using statistics to support our case

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