CWS Market Review – September 5, 2023

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This Is the Tough Time of Year for Stocks

I hope you had a relaxing weekend. Traditionally, Labor Day Weekend marks a big change for stock returns.

A few years ago, I took the entire 127-year history of the Dow Jones Industrial Average and broke down how the index performs for each day of the year. That’s about 35,000 daily figures.

This is what the average year has looked like for the Dow. The index starts at 100 on January 1.

What I found is that historically, the Dow has reached a peak on September 6, shortly after Labor Day, and it’s fallen an average of 2.21% by October 29.

A drop of 2.21% may not sound like much, but it’s an unusually large drop when combining 127 years’ worth of data. That’s more than one-quarter of the Dow’s average annual gain.

Historically, the summer has been a very good time for stocks. From June 27 to September 6, the Dow has gained an average of 3.76%. That means that nearly half of the Dow’s annual gain has come over just 71 calendar days.

I want to stress that I don’t put a great deal of faith in these type of calendar effects. I would never make an investing decision based on one, but I do find them interesting. It seems very reasonable that summer has traditionally been good for stocks and that once the first hint of autumn comes, traders walk back some of those easy gains. This year, Wall Street had a good run from mid-March until late July, but investors may be growing more cautious. Speaking of growing caution, let’s look at last week’s job report.

The Economy Created 187,000 Jobs Last Month

On Friday, the government reported that the U.S. economy created 187,000 net new jobs last month. While that’s higher than Wall Street’s consensus for 170,000 jobs, it did mark the third month in a row of sub-200,000 jobs. On top of that, the jobs numbers for June and July were revised lower. June was lowered by 30,000 and July was lowered by 80,000.

Before reading too much into this, I should caution you that the jobs numbers for August can be tricky. It’s a difficult month to track new jobs. As a result, the revisions to the August numbers can be unusually high. For example, two years ago, the August jobs number was eventually doubled from the initial report. With econ data, it’s more important to look at the overall trends.

For August, the unemployment rate rose to 3.8% which is the highest in 18 months. I also like to look at the “U-6” rate which is a broader measure of joblessness. For August, the U-6 rate rose by 0.4% to 7.1%. It’s now at its highest level since May 2022.

One good sign is that the labor force participation rate rose to 62.8%. That’s the highest in more than three years. In plain English, it means that more people are out there looking for jobs. Once you stop looking, the government stops counting you as unemployed.

Perhaps the most important figure is wages. For August, average hourly earnings increased by 0.2%. That was below expectations of 0.3%. Over the last year, average hourly earnings are up by 4.3%. Wall Street had been expecting 4.4%. Hours worked rose slightly to 34.4. This is important because higher earnings generally means more revenue for business.

Here are some details:

“The U.S. labor market continues to come back to earth but from a very high peak,” said Nick Bunker, head of economic research at the Indeed Hiring Lab. “The labor market was sprinting last year and now it’s getting closer to a marathon pace. A slowdown is welcome; it’s the only way to go the distance.”

Healthcare showed the biggest gain by sector, adding 71,000. Other leaders were leisure and hospitality (40,000), social assistance (26,000), and construction (22,000).

Transportation and warehousing lost 34,000, likely due to the Yellow trucking bankruptcy, and information declined by 15,000.

There could be some cracks showing in the labor market. Last week’s job openings report showed a decline of nearly nine million job openings in July. There are still 1.5 jobs for every unemployed person.

Last week, the Q2 GDP report was revised a bit lower to 2.1%. The day after the GDP report, we also got the personal income and spending data. For July, personal income increased by 0.2%. That was 0.1% below expectations. Personal spending increased by 0.8%. That beat expectations by 0.1%.

The PCE Price Index, which is the Fed’s preferred measure of inflation, rose by 0.2% in July. Over the last 12 months, the PCE has increased by 3.3%. The core PCE is up by 4.2%.

The Federal Reserve meets again in two weeks. I expect the Fed to pause again at this coming meeting, but the following meeting, in early November, is a different story. There’s a chance that the Fed will raise rates again, but it’s far from certain. In fact, it’s not out of bounds for the Fed to be finished with its rate hikes for this cycle. Goldman Sachs thinks so.

Traders currently place the odds of a pause in November at 59%. One week ago, the odds were at 65%.

I’m not ready to say that the Fed is done with its hikes just yet, but we’ll soon get more data. The next important date is Wednesday, September 13 when the next inflation report is due out. If we’re not at the end of the Fed’s rate cycle, then we’re getting very close. That’s good news for investors.

Looking at the Sahm Rule

The economist Claudia Sahm is known as the inventor of the “Sahm Rule” which tells us if we’re in a recession or not.

The rule is simple but the reasoning behind it is very clever. The idea is that if the unemployment rate rises by a little, then it’s likely to rise by a lot.

This is a smart insight because it recognizes that economic cycles tend to reinforce each other. For example, a recession may lead to corporate layoffs. Those layoffs lead to decreased consumer spending. In turn, that leads to lower profits, and so on. In other words, a recession leads to a recession and a recovery builds on a recovery.

This is also why it’s been very hard for the Fed to engineer soft landings.

Best of all, the Sahm Rule is easy to calculate. It says we’re in a recession when the rolling three-month average for unemployment is 0.5% or more higher than the rolling three-month low over the last 12 months.

The rolling three-month average for unemployment reached 3.5% four months in a row (January through April). This means that the Sahm Rule would be triggered if the unemployment rate averages 4.0% for over a three-month period. This is why I took notice when last week’s report said that unemployment increased from 3.5% to 3.8%.

The math is easy. If we have an unemployment rate of 4.2% in September and October, then the Sahm Rule says we’re in a recession. Currently, the Sahm Rule is at 0.13%. Goldman Sachs just lowered its odds of a recession sometime in the next 12 months to 15%. This is the third time in three months that Goldman has lowered its recession odds.

To be clear, I agree that a recession right now is very unlikely. Also, this economy has proven to be far more resilient than a lot of experts thought.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.