Wobble Week
Overview
Much to the chagrin of doomsayers trying to warn of an impending Lehman moment on a large, but obscure, Chinese real estate developer, the S&P 500 managed to finish up a modest 0.5% on the week, led by banks and energy. The week started with an aggressive sell-off on Monday, with an intraday low of 4305.91. However, markets closed up 3.4% from that level on Friday.
Interest rate yields rose, and breadth improved on better economic data that the TV commentators choose to ignore. Despite the VIX spiking to an intraday high of $28.86, credit markets didn’t move much in response, and the VIX closed the week at $17.75.
The Fed
The Federal Reserve made their policy announcement this week and confirmed that, barring a negative surprise, they’re on track to begin tapering asset purchases before year-end. (“Ok Bud Fox, tell me something I didn’t know already, surprise me,” – Wall Street)
Treasury yields rose late in the week. So far, we’ve haven’t seen the tantrum that some strategists have warned would be coming when the Fed announced their tapering plan. QE is still on-going and the Fed’s balance sheet rose at an accelerating pace of 20% last week, the higher rate since April! The message here remains the same: Don’t fight the Fed!
The Fed is slowly building expectations such that nobody should be surprised this time. At the same time, they’re maintaining expectations that the bar to raise interest rates is much higher than to taper.
Household Wealth
The most recent Federal Flow of Funds report shows that household wealth in the U.S. has reached a $142 trillion. This figure increased by $3.5 trillion in the second quarter of 2021. This figure is currently roughly 600% of GDP. The total US stock market cap is “only” $46 trillion. This is a stupendous level of household wealth, and adds fuel to the idea that U.S. investors are still able to “allocate” considerable wealth to equities.
Seasonal Factors
The market is already exiting the choppiest part of the calendar from a historical perspective. Between 1950 and 2020, August (flat) and September (-0.5%) have recorded the weakest average monthly returns. Looking at data reflecting this cycle, 2009-2021, first year Presidential terms (2009, 2013, 2017) and the “deadzone” that we currently sit in.
Market dips of -3-4% are likely still the only buying opportunity for the 4th quarter and early 2022. The average August-October return under QE is a little less than 4.5% in years 2009, 2013, and 2017. We already know this year’s August return of +2.9%, and September’s return currently sits at about -1.8%. With that knowledge, we can forecast October based on the historical data. If history’s patterns hold, then October may potentially return +3.4% (in order to reach the historical +4.5%). If this plays out, it would mean new all time highs in the S&P 500.
Stock Talk Podcast (Weekly Market News and Opinion from Oak Harvest):
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The Investor Mindset Podcast (Introduction to Critical Concepts for Investors):
https://oakharvestfg.com/investor-mindset/
Interesting Reading:
https://news.yahoo.com/exclusive-top-republican-torches-linkedin-110000248.html?guccounter=1
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