Here Comes the Historically Weak Month of September

Jeff Buchbinder (00:00):

Hello everyone, and welcome to LPL Market Signals. Jeff Buchbinder here with my friend and colleague, Dr. Jeffrey Roach. Jeff welcome back from the long holiday weekend. How was it? I know you did a little bit of traveling.

Jeffrey Roach (00:14):

We did. We had a nice time. We did some snorkeling down in Florida, but the the purpose of the Florida trip was to bring my parents back from Florida back to Charlotte, North Carolina. So I had a very long road trip taking the, the folks back, but we did sprinkle in some fun.

Jeffrey Buchbinder (00:32):

Very good. Well, it was family time for me too. I spent some time with, with the in-laws. Didn't do anything too exciting, but it was just nice to have a little bit more time to say goodbye to summer. So and get the kids back to school. So hope all of you had a nice long weekend. The well, we're recording this the morning of September 2nd, so obviously with the holiday changing up the schedule a little bit. So we'll get this out by the end of the day. Tuesday, we'll start, as we always do with a market recap. Then review the Weekly Market Commentary, which is about whether September will halt the rally based on the open this morning. It looks like it might, but we'll have to see. It's just one open. Next we'll talk about what I would say is probably the biggest market news over the weekend, and that's Friday after close.

Jeffrey Buchbinder (01:28):

The tariffs under the International Emergency Economic Powers Act were ruled illegal by the federal court. That's going to go to the Supreme Court next. So we'll walk you through what that means and then close with a preview of the week ahead. And that's where Jeff, we will talk about the jobs report that is the big economic data point this week. So, starting with the market recap, you know, we were down on Monday, Friday, and up every day in between. So I just characterize this as a week with some ups and downs. We ended up flat pretty much, I think the big events of the week, Jeff, I guess you'd say two were economic and one was, was more market oriented. We had the Nvidia earnings news, and then we had the PCE inflation report, and we had GDP. So, do you think it's right that the market went nowhere last week, given those two important data points? And then I, maybe I can weigh in on Nvidia after you're done.

Jeffrey Roach (02:35):

Yeah. Well, I think the short answer is yes, because the GDP report was the second estimate first published last month for the second quarter. And as more data comes in more information on everything from, you know, the sales of autos to the sales of software the BEA does update those. We did have an upward revision for the second quarter driven by software a pretty strong contribution. And this is broader than just some of the AI conversations we've had over the last several months on structures, capital, equipment, physical equipment that's related to the AI development story. This was about software. So your GDP reference was an important one. That was an important data point, did give us a little more clarity on the trajectory of things. And then of course, we had inflation.

Jeffrey Roach (03:29):

I'll talk about that in just a second. But I think the short answer I said was yes, it was okay. Markets were roughly flat because the previous week was all about Jackson Hole. So I think markets are, you know,

rightfully responding to Chair Powell's nudge and hint about September 17th action. And markets responded accordingly. And then I think it's a little bit, if we don't get any shocks, that is a little bit ho hum until that fed meeting, the middle of the month of September. So expect a fairly flattish activity. Unless we get some surprises, certainly next week, we could get a surprise.

Jeffrey Buchbinder (04:14):

Yeah, I guess with the PCE inflation report, that of course, being the Fed's favorite, being in line with expectations, that certainly matches up with a flat week. So I'd say on the economic front, if you want to make a case that the market should have been down, you would look at yields because you know, treasury sold off a little bit last week wasn't really about the tariff situation. I think it was just more of a broader upward push on yields, partly driven by political uncertainty in France and the uk frankly, that's pushed up global yields here today as well. So we've said it a bunch of times on this podcast and elsewhere that yields are so critically important for so many reasons. So we'll keep watching that. In terms of Nvidia I won't spend much time on earnings, but I'll just say that the, these numbers, even though the market sold off a little bit, these numbers were really good because, I mean, first of all, it's amazing that a company that size can grow 50% plus, right?

Jeffrey Buchbinder (05:18):

That's something we'd never seen before which is amazing. Nvidia by itself, pushed forward estimates for the S&P 500 up 0.2%. That is really remarkable. Typically, estimates fall during earning season. They have risen during it, this one, and we've seen Nvidia have that much impact. Keep in mind that China's not in their numbers at all. So that really adds some gravy if they can figure out a way to sell the H20 or some other chip to China in a meaningful way. So, again, has nothing to do with why NVIDIA's selling off. We don't think it's really other factors. Those numbers were, were excellent. So with that, let's keep going. Here's your bond. This is a five day look that, I just priced this morning. So it does show the agg was up for the, for the five day look, but we did see some pressure on the long end of the treasury curve at the end of the week.

Jeffrey Buchbinder (06:22):

I think that was probably the biggest reason why stocks sold off on Friday, given that the inflation numbers were as, as I mentioned in line. We also saw a little bit of upward pressure on commodities. I mean, Jeff, you, I know the you know, leaders of China, Russia, and North Korea and India are all meeting as part of this Chinese summit. Certainly I'd say no progress has been made on ending the Russia, Ukraine war. That's put a little bit of upward pressure on oil prices, and that, of course feeds into inflation. Your thoughts there?

Jeffrey Roach (07:00):

Yeah, we haven't seen a ton of risk coming out of energy prices. You know, clearly we, we had supply chain challenges that was providing a, you know, an uncomfortable nudge up on inflation. Now, I think it's about demand globally. I think one of the biggest risks, probably in addition to just energy side, but, but thinking about the global markets, can the global economies work together and move forward without the U.S.? And so important to remember U.S. has the largest consumer base. And so that's one of the, the risks, I think, when you think about our, our economy and some economies in Europe poised for a slowdown that, that, that's adding a little bit of uncertainty when you see a number of major leaders meeting together, trying to coordinate, coordinate outside of the U.S.. But I think they all know

each of those countries rely a ton on access to one of the biggest markets in the world. And that's here in the United States.

Jeffrey Buchbinder (08:10):

Yeah, we, we could do not just a whole podcast, we could do a whole day on the multipolar <laugh> world and geopolitical implications that, that come with that, but we'll save that for another time. Any rate we do, as you said, Jeff, have a little bit of a geopolitical premium built into oil prices still. We have a geopolitical risk premium built into gold too. Gold hit an all time high over the over the weekend, and you see strong, nearly 5% gain over the last five days in the precious metals index. And this, today we're seeing a little bit of a balance in the dollar, but over the last five days, it's been down a little bit, and the trend certainly this year has been down. So turning to the S&P 500 chart, you know, what's a little bit new here is the strong breadth.

Jeffrey Buchbinder (09:00):

You know, we've been above these nice upward sloping moving average lines for a while, and we just hit an all time high again last week. But the breadth on, in terms of the percentage of stocks above the 200 moving average wasn't really all that strong, let's say a month ago that has, or a couple months ago, that has ticked up and actually exceeded 70%, that was a year to date high last week. So not only do we have a nice trend, nice momentum, but we have pretty good breadth. Now, of course, today's decline, we'll change that a little bit. But the point here is that there's a pretty good technical foundation below this, this market. And then you also have some support levels here that aren't too far away. So we would think there's a good chance that the S&P 500 holds maybe 6,200.

Jeffrey Buchbinder (09:52):

The I mean, the 20 day is above that, certainly. Actually the 50 days above that too, call it 6,200 to 6,300. There's a lot of support. So we're certainly not getting too nervous here even though we are seeing a meaningful sell off today to start the week. So let's transition to the Weekly Market Commentary. This is on LPL.com 'Calm Bfore the Storm" written by Adam Turnquist. And the question really he's trying to ask in this commentary is, is if this rally can continue in September, because as I'm sure many of you know, maybe all of you know, the month of September is seasonally the weakest month of the year, on average, the S&P is down about 0.7%, and it's only up about 44% of the time. So not great. And actually, if you look at the, just the losses, you're down on average about three for the month when you're down.

Jeffrey Buchbinder (10:51):

So, difficult month. But what's interesting here is if you are in an uptrend, so if the S&P 500 is above the 200 day moving average, which as I just showed you it is, then September on average is up over 1% and you're up 60% of the time, plus. That is, you know, pretty good month, <laugh>, those stats would line up with just about any historically good month out of the 12. So we're not particularly worried about seasonality. We certainly continue to think this market needs a little bit of a dip, but this suggests that, you know, maybe we're not going to get as much of a dip as perhaps the media might have you believe. So I'll leave that there. The next section of the weekly is on earnings. So Adam did a really nice job. They're making the point that not only are estimates for the S&P 500 rising, as I just mentioned, but the breadth is strong.

Jeffrey Buchbinder (11:54):

So, you know, the mega caps aren't doing all the work, right? If you have a high percentage of companies seeing positive earnings revisions, that really, again, puts a strong foundation. So we have a strong technical foundation, a strong earnings foundation underneath this market, which is, is certainly encouraging as we, you know, potentially brace for a little bit more volatility. And then you know, we just wrapped up August, of course, small caps were up 7%. So, Jeff, I want your economic perspective on this. 'cause When people talk about small caps, they talk about the macro backdrop as being supportive or, or not supportive. But here you just look at this chart, the top chart is the absolute line, absolute price chart, and you have a golden cross. So the 50 day moving above the 200 day, typically a positive technical pattern.

Jeffrey Buchbinder (12:50):

So we see that as bullish. Now we see small caps more of a short-term trade than a long-term, you know, tactical or strategic overweight. But certainly this is encouraging, and we have been supporters of small caps. Is this short-term trade, the reason we're not really that excited longer term, one of the reasons anyway, is this relative strength chart. The S&P 6 is in a long-term downtrend or intermediate to long-term downtrend versus the S&P 5. So this tells you that small caps have some work to do to reverse this relative underperformance trend that we've seen. Well, we've seen it for a long time, but this chart highlights the last couple of years. Yeah. So, Jeff, thoughts on small caps from a macro perspective?

Jeffrey Roach (13:41):

Yeah, well, a couple things. One is on that second chart you just highlighted, remember that S&P 500 as of now is heavily weighted toward, you know, the mag seven as we've been talking about. But, you know, before then, if you go back in, you know, the 23, 24, you know, perhaps MAG seven is not as dramatic. Maybe we should do a S&P 600 versus the S&P 493. But I think the same story will emerge in terms of just you know, the, the relative performance of small caps. One of the things that we do talk about in terms of small caps is, you know, interest rate sensitivity and then of course, trade uncertainty certainly is weighed on small caps. But I think one of the things you could also say on the plus side would be, if you see the momentum of a market, the momentum factor for those of our listeners that are in the know, you know, that factor tends to hold and, and you see that you, you, you don't, you see that momentum showing up in the small caps as well, and, and you don't want to get in front of that momentum trade.

Jeffrey Roach (14:47):

One of the things just tying in these, these charts with the little title that we have for our WMC Weekly Market Commentary plus as we just introduced it a couple slides ago, can the September performance, can the market hold? One of the things that, you know, we want to just highlight is there are a few events that could provide some shock. It's not going to be a Fed rate decision. They've already told us at Jackson hole that we'll see a cut later this month. But one thing that we don't know for sure is how things are going to shake out at the Board of Governors. So, is Lisa Cook going to be fired for cause? Will she eventually just digging her heels, try to fight back or resign? So some of the, the drama on the board of Governor's side of things, and that will filter through the rest of the federal open market committee made up of board of governors and district presidents. So that's one thing that that's a little bit could be, could be a catalyst for, you know, a shakeup certain to, to be mindful of.

Jeffrey Buchbinder (15:55):

Yeah, great, great point. The upward pressure on the long end of the curve late last week could have been related to some of the headlines around Lisa Cook. Because the market's worry is that if rates go down too much because president Trump you know, gets more control over the, the Board of Governors and the FOMC, then that could be inflationary. So that is absolutely something to watch. Great, great point, Jeff. So if and if yields rise, that typically does put more pressure on small caps. So I haven't looked today but my guess is small caps are underperforming. Actually, I'll look right now. We haven't even opened, well, we just opened the Russell 2000 let's see. Well, the S&P 500 is down, 1% is recording this. We're Russell 2000 down, a little more 1.2%. So there you go. Again, it's a very short period of time. It, we just opened <laugh>. We're just starting to get these quotes. But it's this is not the type of environment where you would expect small caps to do well if there's upward pressure on the on the yield curve. And then you have at the same time a falling market.

Jeffrey Buchbinder (17:17):

All right, let's go talk tariffs. Now certainly, I mean, there wasn't any huge tariff news news until Friday after the close, so it didn't really affect market action last week. But it has been this undercurrent, Jeff, for many months now. And clearly the market shrugged it off to date. Now, maybe this latest news is a little tougher to shrug off. So the question we ask is kind of where does the administration go from here? So this is a chart from Bloomberg. I mean, again, the news is the I-E-E-P-A tariffs were ruled illegal by a federal court that's going to be kicked up to, or appealed to the Supreme Court. It's probably going to take several months for that ruling to come.

Jeffrey Buchbinder (18:06):

And those well, the courts issued a stay, right? So they can keep these, the Trump administration can keep these tariffs in place. I think what's going to get all the headlines and what maybe will be most interesting to people is this chart, right? We were at a 16% run rate on tariffs. Now we're at like six and a half, right? So more than chop these things in half. And so, certainly Jeff, investors who don't like tariffs, or investors who think or market participants more broadly, if they don't like tariffs or they think the market doesn't like tariffs, you would expect the market to celebrate this decision. But it's not. So what do you think the market is seeing here, if indeed the weakness today is at least in part, related to this court case?

Jeffrey Roach (19:05):

Boy, I think part, it's almost split between two main factions, <laugh>. One is the, the impact of tariffs are not going to be as dramatic for the end consumer for the client. So if you're a business, you're thinking about, Hey, can I keep running my business? Like I've been running my business the last several years. And so it's, you know, business as usual trying to create a good experience, consumer experience, have them be loyal to the brand, you know, all that stuff that business owners think about. And then I think this other faction is thinking, you know, this is going to certainly weigh on consumers, and there's no way to get around the cost of tariffs. And they feel like, hey, they could pass those costs onto the consumer. I think there's, there's such a, still such an uncertainty.

Jeffrey Roach (19:58):

We don't, by the way, when you look at the aggregate econ data, you really don't see a dramatic and decisive impact from tariffs. They're still, you're seeing it maybe in some things like apparel for example. But you are not seeing a dramatic pullback in real consumer spending because tariffs hitting importers. And then of course, the other main conversation is how dramatic can businesses be to apply for

exemptions and exclusions as well as reorder supply chains. So there's so many kind of sub subplots as it were going on right now.

Jeffrey Buchbinder (20:45):

Yeah, no doubt. There's a number of reasons. We wrote about this in a weekly market commentary about a month ago, a number of reasons why tariffs haven't really affected companies or the economy all that much. But some of those reasons are temporary, right? And so despite this ruling, you're going to continue to see tariffs come on, the ones that have a different legal basis. You're going to continue to see tariffs come on. And that's the, without I-E-E-P-A, right? You're just, some of these are still coming. Now what we talk about here on this next slide, and there's a lot here, and I'm going to just try to boil this down into one, one or two bumper stickers, and you've heard this from treasury Secretary Bessent. They have a backup plan. They can use different authority to put tariffs back on if the Supreme Court upholds the lower court decision and rules these tariffs illegal.

Jeffrey Buchbinder (21:49):

So the Trump administration can ditch this I-E-E-P-A act and switch to what appears to be either this 338. There's, by the way, there's different opinions on where they're going to go, what the backup plan is, but they could go to this 338 and there's no time limit on that. That could be permanent tariffs. They could be just as high as they've been but that hasn't been used since 1930. And there's legal questions about that. So we might end up going through the same kind of thing where the Trump administration puts tariffs on then has to take them off. So that's possible. It's probably easy. But my opinion based on what I've read, is that they're going to do a combination of temporary tariffs and then investigations that make those tariffs more permanent under a different legal authority. So I think you're going to see a combination of 122 which can last for 150 days, and then most likely 301, which is going to they can say unfair trade practices.

Jeffrey Buchbinder (23:00):

The U.S. trade rep has to do an investigation that takes several months, so then they can slap through a one tariff on countries after they finish the investigation or after that 150 days runs out under section 1 22. Alright, so that's it. I'm not going to go any deeper in the, into this <laugh> 'cause there's, there's uncertainty. And I'm certainly not a legal trade expert. But Jeff, your, your thoughts on this implications, if we have these starts and stops and oh my gosh, it's been hard for the fed to make sense of inflation numbers to date. How are they going to make sense of the inflation numbers in Yeah. Q1, if we're coming on off, on, off, it's, it's a mess. Yeah. Yeah.

Jeffrey Roach (23:45):

Well, I, interesting story. I was just with some clients of LPLs and in the audience was a gentleman who runs a trade consultancy works with importers all the time. And the, the 301 section where unfair foreign trade practices is the rationale. I tell you, hearing his stories you definitely could see that, that that has a legitimate place, I think in, in policy section 301, and then of course 338. I think one of the things that could go well in that is since it hasn't been used for decades upon decades, there's just a lot more fuzziness in the application. Perhaps that might be a way to, to use it to, to the current administration's advantage. But certainly a lot of really, really challenging things going on when you think about how other countries treat our exports. And I'll leave it at that. So the excellent, excellent slide, Jeff. So, I it's one of those things. You just take a, a snapshot of this and then you can dig deeper on your own time, not on this podcast, because there's a lot there.

Jeffrey Buchbinder (25:05):

Yeah. We'll put this into a blog on LPL.com and people can spend more time with it and kind of digging in. Another element of this is do tariffs get rebated <laugh>, right? So we might actually have a hundred billion dollars stimulus hitting the, the economy, because that money's going to go back to companies that paid the tariffs. Of course, then it could be reversed later if the tariffs go back on. But you'll, they'll at least have that money in the bank, and then in the end, you'll end up having less tariff impact. But you might get to the same kind of run rate, probably a little lower by the way that, you know, we've been talking about 15% as a landing spot. Maybe the landing spot now is 13, or maybe it's 12. We'll see. But it's probably going to be a little bit lower just because of all this, this legal morass, we'll call it <laugh>. I think that's a good, a good word for it. So, more to come there. We still are a few months away from a Supreme Court ruling, most likely. All right, week ahead. Thankfully we're not going to have to spend too much time filing the legality of tariffs under those different acts. Jeff, I think we can focus on the job market. We get the jobs report this week. That is a big one.

Jeffrey Roach (26:22):

Yeah, that's right. So we do have a couple of other labor related data. So Jolts that you highlight there on the, on the left side of the screen, as well as the ISM numbers. You have prices paid, but ISM gives us a snapshot of employment as well. And then claims that comes out every Thursday, a DP. But really the topic, the hottest of all this week will be the non-farm payroll report Friday morning, 8:30 Eastern. And a couple things to anticipate don't expect revisions probably to be at the same levels we saw last month. Do think that we are going to cons, consistently hover below 100,000 which is kind of a healthy number you want to get for an economy that's chugging along when you see jobs job growth go closer to 50K, maybe even sub 50K on a consistent basis.

Jeffrey Roach (27:22):

That's definitely one of the strongest signs that consumer spending will, will start to slow, is wage growth and income growth, job growth, et cetera, all slow. So here's, here's why expect a weaker than consensus number is the fact that last week's consumer conference data suggested that most consumers have reported just self-reporting saying jobs are a lot more hard to get less plentiful than they were before. That does a great job in predicting the unemployment rate specifically. But in general, it suggests that the labor market is slowing down. Again, we talk about slowing. We're not, we're not saying cratering. So this is not necessarily an outright bearish view, but it's saying we're, we've been in this late cycle environment for quite a while now. We're continuing to slow down, and that's going to be eventually show up in, in consumer activity. So, sub consensus, I think we're going to be closer to 50K than we're consensus is. And I do think that we'll have a slight uptick in unemployment. One thing that could be a somewhat of a positive, long-term positive is that labor force participation rates seem to be recovering consistently. So just more people coming out of, off the sidelines into the labor force, whether looking for work or actually hired and, and working. So that's, that's the expectation for Friday morning.

Jeffrey Buchbinder (29:04):

I'm glad that you made a call on the job support, Jeff, because I do not want to do one. I have had a terrible time trying to predict that, that job support even you know, when trying to factor in comments from you and from others it, it's just a, it's a tough, it's a tough number to predict, but I agree with you that the general trend is slowing labor market that is clear. And the Fed has told us they, they see that as well. So so thanks for that. We are we'll go ahead and wrap here. We're at the end earning season. So

you know, you'll get a couple of stragglers, but I think we're at 494 s and p 500 companies having reported. So I mean that, the good news is that the buyback window is open, so that can be supportive.

Jeffrey Buchbinder (29:52):

Because Now the companies have reported they can start buying back stock again. This is a record year for buyback announcements. 1.1 trillion I think is where we're tracking to. But the bad news is we don't have good news from earning season as a catalyst. So this might be a logical place for the market to take a little bit of a breather. Because We're not going to have fundamental news. We're just going to focus on macro. And there of course is you just alluded to Jeff, there's a little bit of anxiety around the job market and certainly anxiety around the fed and inflation. So keep watching the macro here. That's really going to be the focus in in September until we reload for third quarter earning season, starting in mid-October, the, the month where bear markets go to die <laugh>. So, but we got still September to get through. So any, again hope all of you had a really nice long holiday weekend. Thanks for joining us on LPL Market Signals. Thank you Jeff, for jumping in early, basically fresh out of the long drive back from Florida. Everybody have a wonderful week and take care. We'll see you next time.