- Consumer confidence weakens sharply in August
- Employers starting to pump the brakes on hiring
- Why ‘bad economic news’ could mean ‘less Fed’
August has proven to be a bumpy month for equities.
And if the Trader’s Almanac is any guide – it’s not surprising.
August and September are typically weaker months for stocks.
For example, over the past decade, the S&P 500 has managed an average gain of 0.1% for August.
Dismal.
If you go back two decades, it becomes an average loss of 0.1%.
Why?
Who knows for sure.
Maybe it’s due to most of Wall Street taking summer vacation in The Hamptons – meaning trading volumes are low.
Or it could be some traders locking in profits ahead of September – which boasts the worst record of any month in the calendar.
For example, the S&P 500 has lost an average of 1% each September over the past 10 years.
Remember 2022?
The Nasdaq lost 10% during the month. Ouch.
To be honest, I have no clue as to why these are generally weaker months.
But those two things come to mind.
At the time of writing, the S&P 500 finished last month at 4588 (with 5 straight months of gains)
With just two trading days left in the month – the S&P 500 is lower by ~2% for the month.
Therefore, the 20 year average loss of 0.1% could be close.
Aug 29 2023
Whilst I think this market wants to go higher – a re-test of the 35-month EMA zone of ~4,000 should not be ruled out before the end of October.
That’s very much a contrarian call – but it’s possible.
And if we are lucky enough to see something around 4,000 – long-term buyers might consider adding to the Index.
Sure, this could easily fall lower, but if your view is at least 3-years, then I think 4,000 for the S&P 500 looks like a reasonable risk reward.
And should we be really lucky to see 3800 – don’t panic – buy some more.
Bad News Sends Stocks Higher
Today it was all sunshine and rainbows for risk assets.
Bond yields were all sharply lower – which is generally good news for stocks.
This means bonds caught a bid (i.e., sending yields lower).
Bond prices trade inversely to their yields.
However, there might have been two other data points which pleased the bulls:
- Weakening consumer confidence; and
- Job openings missing expectations
Wait a minute… this is not good economic news?
Correct. It’s bad news.
Consumers are feeling far less confident about the future; and employers are reducing hiring.
None of this good news for growth.
But from the bull’s perspective – this could mean there is less pressure on the Fed to tighten rates.
For example, if you look bonds today (e.g., the US 10-Year) – that’s exactly what we saw.
Below is the daily price chart:
Aug 29 2023
Bond yields typically trade lower when traders feel less optimistic (i.e., traders buy bonds)
With respect to the Job Openings and Labor Turnover Survey (JOLTS) survey – employers are clearly slowing hiring.
Makes sense – this is a highly uncertain environment.
Take a look at the trend from January 2020:
In addition to JOLTS falling – people quitting jobs declined from 3.802 million in June to 3.549 in July.
Put another way – workers now feel less confident about finding a new job if they quit.
Finally, early jobs data from job recruitment company Indeed showed that job openings continued to slide in August.
Consumer Confidence also Drops
With respect to consumer confidence, it too declined sharply over August as shoppers reflected constrained budgets driven by rising food and gasoline prices.
Consumer confidence came in at 106.1 vs expectations of 116
Here’s the Conference Board on the print:
“Assessments of the present situation dipped in August on receding optimism around employment conditions: fewer consumers said jobs are “plentiful” and more said jobs are “hard to get.”
Hard data confirm that employment gains have slowed, overall wage increases are less generous compared to a year ago, and the average number of weeks of unemployment is ticking upward.
Business conditions in August were little changed from July, but still somewhat lower than in June. When asked about current family financial conditions (a measure not included in calculating the Present Situation Index), the share of respondents citing a “good” situation fell, and those citing “bad” conditions rose, signaling concerns about family finances presently.”
Here’s my question:
If consumers are not confident about their financial future – how does that bode well for growth (and consumption)?
Retail Shows Signs of Slowing
With 70% of US GDP driven by consumption – it pays to check in with what we see with any trends with retail.
As I like to say “never underestimate the US consumers willingness to spend”
For example, credit card debt recently topped $1 Trillion – where the average interest rate is above 24%
What credit card limit?
And whilst retailers are hopeful of the consumer coming back to spend in the second half – uncertainty remains.
Consider Best Buy – a large consumer electronics retailer.
They have cut jobs at many of its stores and had suspended buybacks – where comparable second-quarter comparable sales declined 6.2% YoY (where online sales dropped 7.1% YoY).
For the full year, Best Buy expects comparable sales to decline from between 4.5% and 6% compared to earlier guidance calling for a decline of 3% to 6%.
My take:
- People bought all the “TVs”, “iPads” and “Xboxes” they needed over COVID using govt handouts; which means
- Consumption of discretionary gadgets was brought forward.
In other words, Best Buy’s 2023 growth happened in 2022.
How about Target – one the largest retailers in the US?
They reported a decline in second-quarter that CEO Brian Cornell blamed partly on a “negative reaction” to its Pride Month collection.
That sounds like a cop-out… it’s more to do with excess inventory and getting the mix wrong.
Target depends far more on discretionary items (vs essentials like food and grocery).
The retailer reported a 5.4% YoY decrease in comparable sales—which tracks sales online and at stores—including a 4.3% decline for stores and a 10.5% decline in digital sales
The CEO believes the lower spend is due to the strain that inflation has put on many consumers’ budgets, causing them to avoid non-essential purchases.
However, both Target and Best Buy remain optimistic the US consumer will rebound in the second half.
They might.
But what would cause that?
Putting it All Together
One thing which could cause consumers to feel a little more confident is lower inflation.
And specifically shelter, food and energy prices.
That’s where they feel it.
However, these are trending in the other direction.
Now tomorrow we’re due to receive ADP’s National Employment Report.
It will be interesting to see how the market interprets this data.
For example, if we learn that hiring continues to be robust – this could imply “more Fed”.
More Fed will likely pressure stocks.
On the flip side, a weaker than expected ADP report could imply consumers’ spending power is diminishing.
Either way, whilst less demand and softer wage gains will help the Fed’s fight against inflation – it also points to a slowing economy.
That’s where I think we are headed in 2024… where I am not ruling out a recession.
For now, bad news may be “good news” for stocks (as it potentially means less Fed).
However, at some point (and we’re not there yet) – bad news will mean bad news.