Looking Ahead: September brings more price action.
We ended the week and month with little change. The S&P 500 peaked in mid August and has traded within a 1% range for most of the last two months. Ten-year U.S. Treasuries sit comfortably at 1.56% after a very brief spike following the Jackson Hole speech. It’s the same story overseas. Europe and Japanese bonds and equities seem content to trade within narrow bands and low volumes.
1. Jobs: We write this on Thursday evening. Our estimate is for around 175,000 after last month’s blow out number of 255,000. Mind you, these numbers are notoriously subject to revision. It's common for the final number to be 70,000 off in either direction. But here’s the chart with an overlay of just how weak the economy was in the first two quarters.
We’re also a concerned about this next graph. These are the Purchasing Manager’s Indexes with the employment components. Anything above 50 is expansionary. Below 50 is contractionary.
Notice, they have all taken a click down in the last month or two. Explanations are in short supply. But the overall pattern is that for every strong data point, we get two or three bland ones. Meanwhile the PCE numbers (the inflation number the Fed follows) came in at 1.6%. The target is 2%. It hasn't been consistently above 2% for nine years.
The Fed continues to ad lib about negative rates. Oh for the days when Volcker would have taken them out to the woodshed. One thing we feel pretty sure about is that there won’t be any hike in September.
2.Emerging Markets: We haven’t written about Emerging Markets in a while. Here’s the chart..
Most of the markets (here's a selection of some Asian stocks) are still below their all time highs in 2007. But in the last three months, we’ve seen some good performance in the China and Hong Kong markets. Why? There has been a slow recovery in manufacturing, the dollar lost some of its momentum and the China economy performed better than expected. So, Emerging Markets is another example of just when we hear nothing good (i.e. most of 2015), it started back up again.
3. Money Market Funds:There was some serious overhaul of money market funds a few years ago and they are about to hit. Institutional money market funds will float their NAVs. Some institutional investors may no longer be able to buy the funds because of internal guidelines. So many of the funds are shortening the maturity of their assets in case a flood of redemptions comes their way. How do they do it? They buy assets at LIBOR.
Hence the big uptick in the LIBOR rate. Now, as an investor this is unlikely to concern you because retail funds continue to use a stable NAV and invest in Treasuries. Still, it does show that even good regulation can have a very big market effect.
Bottom Line: Some of the low volatility is seasonal. News is slow. The Apple story took plenty of headlines but the total tax bill for the last 20 years is less than 20% of one year’s income. We expect more price action in September but not that would require major portfolio changes.
Facebook suggests you friend one of your psychiatrist’s patients
Irish press on that Apple tax thing
--Christian Thwaites, Brouwer & Janachowski, LLC
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