Jackson Hole Faces a Gordian Knot; Will Powell Have a Sword?
With the calendar now parked in the late August vacation season, trading volumes notched the lowest levels of the year. Market participants exchanged Bloomberg terminals, spreadsheets, and Wall Street addresses for beaches, boats, and beers this week. Even members of the MWM team honored the fleeting late summer season by enjoying each other’s company outside the office after Friday’s market close. Given the resulting time constraints, this week’s HAI will offer just a brief update.
Overall, the market set-up remains broadly unchanged from that described previously. As discussed last week, the booming summer “Catch-22” equity rally off the June market lows is fundamentally self-defeating. The rally is based on expectations for a Fed pivot that is unlikely to materialize as long as the market continues to rally and effectively loosen financial conditions. At least as of this week, the rally began stalling out. The bullish technical, sentiment, and positioning factors that initially catalyzed the rally are exhausting themselves. Overstretched major market indexes are now also running into the stiff resistance provided by both the falling 200-day and 50-week moving averages. Additionally, after marked improvement during the bear market rally, market internals began demonstrating notable deterioration once again this week.
As the week wore on, selling pressure became increasingly intense. By week end, Goldman Sachs’ trading desk reported that short sales outpaced long buys 3 to 1, ending a streak of what had been relentless short covering for weeks. Accordingly, every major stock index closed the week lower except the defensive Dow Jones Utilities.
If the bear market relief rally is topping, that would be entirely in keeping with historical precedent. According to Bank of America data, in 43 S&P 500 bear market rallies gaining more than 10% since 1929, the average countertrend advance was 17.2% over an average duration of 39 trading days. At present, the tally for our current S&P bear rally is a trough to peak move of 17.4% in 41 days—as BofA put it, a “textbook” bear rally to date.
Meanwhile, the market’s August snooze window is running hard up against the pending autumn “crisis season.” As market participants migrate from the beach back to reality, HAI recommends a strong cup of coffee and deep consideration after a fresh look at the fully packed threat board that awaits.
U.S. economic data this week was mixed overall. On the island of economic strength, unemployment claims and retail sales were relatively positive. On the other hand, however, where the economic data was bad, it was downright grisly. The New York Fed’s Empire State Manufacturing Survey absolutely cratered from an 11.1 reading to a shocking -31.3 print. Consensus expectations for the measure were 5.0. It was the 2nd biggest monthly drop on record for the survey.
A heap of new housing data was also brutal. The National Association of Home Builders/Wells Fargo Housing Market Index declined into contraction territory for the first time since the beginning of the pandemic, and NAHB Chief Economist Robert Dietz said he now believes the U.S. is in a “housing recession.” Separate data revealed that existing home sales have now fallen for six straight months, and the nearly 26% decline since the beginning of the year marks the steepest plunge on record in data stretching back over two decades. Meanwhile, U.S. housing inventory is now growing at a record pace. According to Bloomberg, mortgage lenders have turned “desperate.” Housing is a leading indicator, and as UCLA economics professor Ed Leamer puts it, “housing IS the business cycle.” Accordingly, the data spells trouble already in the pipeline for the rest of the economy.
Elsewhere, overseas data reminded central bankers all across the globe that inflation remains a sharp-toothed bear to be feared. First, UK inflation accelerated more than expected to 10.1%. The island nation earned the dubious distinction of becoming the first major developed country in this cycle to reach double-digit consumer price inflation. The real stunner of the week, however, came on Friday when Germany reported that producer prices had reached the stratosphere. German PPI increased at a 37.2% year-over-year rate. The month-over-month increase was an unfathomable 5.7%. For Deutschland, that’s a year’s worth of hot inflation packed into just one oh-so-sizzling summer month. These are numbers befitting a sickly emerging market economy, not the economic engine of Europe! Nomura’s Charlie McElligott rightly described the data as “apocalyptic.”
Next week, The Federal Reserve Bank of Kansas City will host the annual Jackson Hole Economic Symposium in Wyoming. Fed Chairman Powell is set to speak on Friday. The market will be looking for any and all signals from the Chairman on Fed policy intentions and biases. The stakes are incredibly high. The world’s leading central bank is standing in a minefield comprised of arguably the most complex and challenging set of circumstances yet faced by modern monetary managers.
How Powell and company navigate from their perilous footing will significantly impact markets across the spectrum of assets. Market participants will be looking to see whether Powell’s policy insights will enable the Fed to deliver a Goldilocks-style soft landing. As famed investor Ray Dalio observes, “He who lives by the crystal ball will eat shattered glass.” Well, no crystal ball here, but if gauging probabilities on how current dynamics play out over time, HAI ultimately favors gold over Goldilocks for traversing what promises to be a rocky road ahead. In the immediate term, however, all eyes on Jackson Hole and Powell’s next step.
Weekly performance: The S&P 500 lost 1.21%. Gold was off 2.90%, silver was smacked by 7.87% on the week, platinum was hit by 7.44%, and palladium was lower by 3.97%. The HUI gold miners index was down 6.72%. The IFRA iShares US Infrastructure ETF was off 0.72%. Energy commodities were mixed. WTI crude oil shed 1.79%, while natural gas gained 6.48%. The CRB Commodity Index was off 0.49%, while copper was little changed, down 0.22%. The Dow Jones US Specialty Real Estate Investment Trust Index was down 1.33% on the week, while the Vanguard Utilities ETF (VPU) was up 1.16%. The dollar ripped higher by 2.45% to close the week at 108.1. The yield on the 10-yr Treasury gained 14 bps to end the week at 2.98%.
Equity Analyst & Investment Strategist