[Outlook] We Are in the Period of Hot Air and Blue Skies

But the Month of September is Ahead! We Are in the Period of Hot Air and Blue Skies, But the Month of September is Ahead! By Donn Goodman September 01, 2024 Welcome back subscribers and loyal readers. Hope you have had a good and profitable week in the markets and in life. We closed out yet another positive month of returns for 2024 as investors are encouraged seeing the softening occurring in the economy which will likely give the Federal Reserve room to lower rates at their upcoming September meeting. Wishing you and your families a happy and healthy Labor Day Holiday. I grew up in a small town about 40 miles west of Cleveland. During my youth the city was dominated by major manufacturing and raw material providers. This included a Ford Motor Assembly plant (Thunderbirds and Vans), one of the largest US Steel plants, National Gypsum (they manufactured walls) and American Ship Building Company which produced large freight ships. This dry dock known as the “Lorain Yard” was built in 1898 and closed in 1984 over labor disputes. American Ship was owned by George Steinbrenner who eventually decided to put his interests in baseball with his purchase of the New York Yankees. My father saw George at lunch once or twice a week and they were friends. I tell you all this because my life from an early age was filled with “labor” and our town eagerly anticipated “Labor Day” and there were parades and festivals. Later in life I became an investment consultant to quite a few Taft-Hartley Labor Unions and found myself once again in the crosshairs of important Labor Day festivities. Most people are unaware that Labor Day originated to celebrate the laborers in our country who built this country from the ground up. These were the people who made our economy go and who also built the housing, bridges and office towers. Here is the description of how Labor Day began: Labor Day pays tribute to the contributions and achievements of American workers and is traditionally observed on the first Monday in September. It was created by the labor movement in the late 19th century and became a federal holiday in 1894. Labor Day weekend also symbolizes the end of summer for many Americans and is celebrated with parties, street parades and athletic events. We have a different economy now. Even though we still celebrate the same holiday, our work force has changed dramatically. Instead of all the labor performing most of the economy’s vital tasks, we now have programmed robots building our cars and moving goods around at the thousands of Amazon distribution centers. Also, we now have coders, programmers and electrical engineers doing much more of the economy’s heavy lifting. I would certainly include these important workers among the list of Laborers that we will celebrate this coming Monday. For without them, not many industries would be able to function with the efficiency and profitability we are experiencing today. “Both optimists and pessimists contribute to society. The optimist invents the aeroplane, the pessimist the parachute.”- George Bernard Shaw Hot Air I probably do not need to remind you that we are in an election year with divisive political rhetoric at the local, state and most especially, federal levels. So far most of this rhetoric has not overly influenced the stock market (see corporate earnings below), but it may begin to as the markets begin to factor out who might be the next President and start to let their policies begin to influence corporate America. An imminent reduction in Fed borrowing costs? Jerome Powell and the Federal Reserve began hiking rates in March 2022. They went on one of the most aggressive hiking campaigns in over 23 years. The chart below shows how dramatic this rising rate cycle has been: While many Wall Street pundits believe that a 0.50% is warranted given the length of time that rates have stayed higher for longer coupled with significant signs of slowing in the economy (unemployment quickly rising) and the CPI and PCE both coming down towards the Fed’s targets. This writer does not buy that narrative and given pockets of sticky inflation (rents, insurance and service industries), one could make the case that the Fed should wait. However, given this is an election year and they hear the many complaints from bankers, consumers and small company borrowers, they are likely to reduce rates. My call is no more than 0.25% (I have been known to be wrong many times). We covered this in detail in last week’s Market Outlook. [If you want to review it or have not yet read it, you may go here](). How might the stock market react if/when the Fed cuts rates? See graph below. Corporate profits continue to drive the markets. In this column throughout 2024 we have emphasized that good corporate earnings are holding up stock prices in the face of higher for longer interest rates. Fed fund rates remain at 23-year high, but the stock market forges ahead mainly because corporate earnings have been so good. The 2nd quarter earnings season is drawing to a close with Nvidia’s earnings this past Wednesday. What we have experienced is an S&P 500 earnings growth rate of 10.9% marking the highest earnings growth rate since the 4th quarter of 2021. But the difference is that period of time had a growth rate so high because of the government COVID stimulus which began in 2020. See the corporate earnings chart below: Corporate profits. "You can put this in the 'no recession' column ... U.S. corporate profits rose to a new all-time high in the second quarter." Another area that we like to watch, that is often telling of just how well corporations are doing, is the high yield bond market. (We have a high yield bond strategy that we use for investors that has beaten a traditional bond market investment every year going back 5 years. If you would like more information about using it and/or having us manage $ for you, please reach out to my partner Ben@MarketGaugePro.com) The following chart is a good example of just how well corporations are currently doing by using their profits and free cash flow to cover their borrowing costs. Use the links below to continue reading about: - Blue Skies – New Highs - Growth vs. Value - Sector other market rotation trends - Sentiment - Fund Flows - Election year trends - Big View Bullets - Keith’s Market Analysis Video [Click here to continue to the FREE analysis]([Click here to continue to the PREMIUM analysis]() Best wishes for your trading, Donn Goodman Every week we review the big picture of the market's technical condition as seen through the lens of our Big View data charts. The bullets provide a quick summary organized by conditions we see as being risk-on, risk-off, or neutral. The video analysis dives deeper. Risk On - After a horrible start to the month, markets had a historic rebound with three of the four closing positive on the month with the [S&P and DOW]() closing on new weekly all-time highs. All four are in bullish phases. (+) - [Asian equities]( were hotspots this week, led by Malaysia and Hong Kong. (+) - McClellan Oscillator [remains positive]() for both the Nasdaq Composite and the S&P. The cumulative advance/decline line is sitting at new highs. (+) - The S&P 52-week New High/New Low ratio remains positive but [potentially overbought short-term](=). (+) - [Risk gauges]( remain fully risk-on. (+) - On the [color charts](), which looks at various moving averages of the % stocks above key MAs, we are 100% positive in all time frames. A very bullish reading. (+) - The number of [stocks above key moving averages]() strengthened for both the SPY and IWM and are all stacked and sloped in a bullish manner. (+) Use the links below to continue reading about: - Blue Skies – New Highs - Growth vs. Value - Sector other market rotation trends - Sentiment - Fund Flows - Election year trends - Big View Bullets - Keith’s Market Analysis Video [Click here to continue to the FREE analysis and video.]()[Click here to continue to the PREMIUM analysis and video](). 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