Economy and financial market trends review

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Economic And Financial Market Trends Review

Recently, the economy and financial markets have experienced significant volatility. This presents a good opportunity to review the current conditions. We’ll also briefly share our perspective on the investment landscape.

Economic indicators

Among the many economic indicators we are monitoring, the most significant one is the Unemployment Rate. The latest employment report from the Labor Department presents a mixed picture.

Although the unemployment rate declined from the previous month, it remains significantly higher than the same period last year. Moreover, the trend suggests that the unemployment rate is actually increasing. Additionally, the Labor Department has continued to revise downward the payroll numbers for previous months, which may indicate that the job market is in a more precarious state than initially thought.

Next, let’s examine retail sales, a key indicator of consumer spending. Unfortunately, the latest reported figure is still from July. We’ll have to wait more than a week to receive the August data.

Once again, July’s number is slightly worse than the previous year’s, although the difference is not substantial.

The industrial output for July is actually positive, showing a slight improvement year over year.

After adjusting for inflation, Real Personal Income remains positive on a year-over-year basis, with July’s figure continuing to show a modest gain.

In terms of inflation, the Consumer Price Index (CPI) has continued to decline, with July’s reading falling below 3% for the first time.

A cursory glance at the historical CPI chart reveals that the current figure is now at the upper end of the range since 2009. However, the trend is unmistakably downward and declining rapidly. Moreover, Federal Reserve Chairman Powell has signaled that an interest rate cut is highly likely in the coming weeks. The question now is not if, but rather how much – specifically, whether the cut will be 25 basis points (0.25%) or 50 basis points.

Other economic indicators show that US housing prices in major cities continue to trend upward. According to Redfin data for July, home prices nationwide increased by 4.0% year-over-year. Additionally, the number of homes sold rose by 6.3%, while the number of homes for sale surged by 19.2% during the same period.

To summarize, we are observing a broad-based slowdown in the US economy. However, there is no clear indication that the economy is headed for a recession or is already in one. It’s essential to note that most economic indicators are either coincident or lagging, meaning that we typically can only confirm a recession with certainty a few months after it has begun.

Financial market trends

Moving on, let’s take a look at the prevailing trends in major asset prices.

Major Asset Classes Trend 09/06/2024

Description	Symbol	1 Week	4 Weeks	13 Weeks	52 Weeks	Trend Score
Gold	GLD	-0.29%	2.7%	8.99%	29.51%	11.06%
US Equity REITs	VNQ	-0.19%	4.24%	15.88%	21.48%	10.38%
US Stocks	VTI	-4.29%	1.34%	1.69%	22.15%	5.27%
Total US Bonds	BND	1.23%	1.93%	5.61%	9.51%	4.64%
International Developed Stks	VEA	-3.86%	3.01%	0.57%	15.93%	3.6%
Emerging Market Stks	VWO	-2.73%	-0.11%	1.04%	11.97%	2.97%
Treasury Bills	SHV	0.12%	0.44%	1.41%	5.39%	2.0%
Commodities	DBC	-3.8%	-4.23%	-6.55%	-10.95%	-5.92%

Observation: Notably, all major asset prices, except for Commodities, continue to exhibit positive trend scores. It is also noteworthy that Gold has now risen to the top spot in the trend scores, ranking number 1.

US Equity Style Trend 09/06/2024

Description	Symbol	1 Week	4 Weeks	13 Weeks	52 Weeks	Trend Score
Russell Largecap Value	IWD	-3.04%	2.61%	4.48%	18.31%	5.63%
Russell Largecap Index	IWB	-4.26%	1.35%	1.54%	22.31%	5.32%
Russell Midcap Value	IWS	-3.37%	1.98%	4.44%	17.88%	5.02%
Russell Largecap Growth	IWF	-5.29%	0.14%	-1.35%	25.11%	4.69%
Russell Smallcap Value	IWN	-5.03%	1.5%	5.39%	15.76%	4.28%
Russell Midcap Indedx	IWR	-3.63%	1.64%	3.45%	17.43%	4.24%
Russell Smallcap Index	IWM	-5.53%	0.7%	3.62%	14.59%	2.89%
Russell Smallcap Growth	IWO	-6.08%	0.0%	1.82%	13.27%	1.5%
Russell Midcap Growth	IWP	-4.77%	0.39%	-0.11%	14.8%	1.39%

Observation: It’s striking that small and mid-cap stocks are still lagging, according to their trend score rankings. Normally, in an environment where interest rates are falling, small-cap stocks would be expected to outperform, given their heightened sensitivity to borrowing costs. Yet, the trend indicates that investors are still unclear on how to position themselves ahead of the anticipated interest rate cut.

US Sectors Trend 09/06/2024

Description	Symbol	1 Week	4 Weeks	13 Weeks	52 Weeks	Trend Score
Utilities	XLU	-0.5%	3.12%	9.41%	24.26%	11.47%
Financial	XLF	-3.17%	4.46%	7.2%	31.37%	9.95%
Consumer Staples	XLP	0.58%	4.85%	7.67%	19.18%	8.87%
Healthcare	XLV	-2.07%	2.65%	5.55%	18.46%	6.1%
Communication Services	XLC	-4.07%	-1.69%	-0.48%	26.4%	5.2%
Industries	XLI	-4.24%	1.3%	3.26%	21.11%	5.01%
Telecom	IYZ	-1.74%	4.0%	8.78%	6.58%	4.94%
Consumer Discretionary	XLY	-2.52%	4.62%	2.89%	8.95%	3.11%
Materials	XLB	-4.66%	1.5%	0.59%	12.12%	2.2%
Technology	XLK	-7.45%	-0.83%	-5.25%	18.93%	0.82%
Energy	XLE	-5.77%	-3.8%	-3.66%	-3.44%	-3.51%

Observations: Amid the current stock market weakness, we observe that defensive sectors such as Utilities, Consumer Staples, and Healthcare are holding up relatively well. In contrast, the Technology and Energy sectors are rapidly falling to the bottom of the pack. As the current correction or weakness may not have yet run its course, we will likely gain a clearer picture in the coming weeks. For now, it is evident that investors are adopting a defensive posture.

US Stock Shiller CAPE (Cyclical Adjusted PE) ratio (see this)

Since the mid-1990s, US stocks have maintained an elevated level, with the 2008-2009 financial crisis only briefly bringing them down to a more historically average level. Currently, we are at a level that surpasses even the pre-Depression peak of 1929.

Our takeaway

Generally speaking, the economy has experienced a significant slowdown. However, the situation is not uniformly bleak. Moreover, even if the economy is heading into a recession or is already in one, the question remains as to how severe it will be. In the event of a shallow and short-lived recession, the financial markets may only experience a mild correction. On the other hand, considering that we are currently in one of the most highly valued stock markets in history, a wide range of possibilities exists, including a deep and prolonged downturn of 50% or more.

In short, we are uncertain about what lies ahead. What is clear, though, is that it is essential to stay the course and be prepared for a potentially wild ride – which, in fact, is always the case.

Market Overview

Since our previous newsletter, the stock market has experienced a sharp decline. Notably, Nvidia (NVDA), a market favorite, has fallen by more than 25% from its all-time high. We remain enthusiastic and optimistic about the future of Artificial Intelligence (AI). However, as is often the case, financial markets are constantly in a state of trial and error, frequently getting ahead of themselves in both bullish and bearish phases. We are not surprised that the recent parabolic rise of AI-related tech stocks has been subject to multiple “air pocket” style bubble pops. Whether this correction will spread to other sectors or manifest in a more significant way remains to be seen. For instance, we observe that value stocks recently reached all-time highs and have undergone a less severe correction, suggesting a more nuanced market landscape.

As always, we claim no crystal ball and we call for staying the course which is guided by well-defined and sound strategic and tactical strategies:

For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as we have emphasized numerous times when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years, preferably much longer, given the current high valuation. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later and preferably many more years later) will deliver some reasonable returns. If you are comfortable with this thesis, you should sit tight and forget about the current gyration.
For tactical investors, again, you have to ignore the current market noise. Also, you should follow your strategy rigorously, especially during this time. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This is true time and time again.

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of market is through dollar cost average (DCA), i.e., invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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