Tariffs, stagflation fears, and seasonal drags: welcome to market hurricane season.
KEY TAKEAWAYS
Markets are in peak seasonal weakness–August and September historically perform worst
Stocks face headwinds: expensive valuations, rising inflation, soft jobs, tariffs, weak housing, geopolitical risk
The Fed is paralyzed–can’t cut without risking inflation, can’t stay tight without risking jobs
This week is loaded with economic data, retail earnings, and Powell’s Jackson Hole speech
We may be in the eye of the storm–calm now, but September looms large
MY HOT TAKES
Seasonality isn’t superstition–it’s history, and investors ignore it at their peril
Markets are swimming upstream, but momentum can blind people to macro headwinds
Powell will likely disappoint traders hoping for dovish hints at Jackson Hole
The Fed’s blunt tool doesn’t solve tariff inflation–this is structural, not cyclical
September could be the real test of whether we’re in a storm or just turbulence
You can quote me: “Markets are in the eye of the hurricane—calm now, but calm can be dangerously deceiving.”
Eye of the storm. If you have been paying attention to the news, you may have heard that the first hurricane of the season has come into being: Erin, a Category 4 storm somewhere in the Atlantic off the coast of Cape Hataras. Hurricane season started way back in June, but it peaks during August, so meteorologists were probably expecting something or other to pop up.
I am sure that you have heard that markets too, are seasonal, and unfortunately, we are also in peak storm season for equities. It’s true. Historically, August tends to be a low performer, followed by September which gets the prize for worst-on-average return. I feel the urge to share a chart, so you can see two things. 1) I am not making this stuff up, and 2) how awesomely powerful information from Bloomberg can be. Check it out and keep reading.
This is a heatmap that shows S&P 500 monthly earnings going back 20 years. The top row shows the 20-year mean. In very, very basic stats we would say that those numbers are expected. That said, one could say that we expect August and September to be… um, challenging months, based on 20 years of history.
August is just past the halfway mark and you will note that we are already ahead of the “expected” monthly return. Ya, month-to-date the S&P is up by 1.74% and, based on history, we would only expect to earn 0.01%--don’t do the math, it’s really small–trust me. The point here is that markets are swimming upstream facing significant currents and headwinds.
To name just a few. Stocks are expensive, inflation is ticking higher, employment seems a bit weaker, tariffs are real and they are here–for real, consumer confidence is all over the place and trending weaker, housing is in the dumps, and geopolitical risk is sharply higher. All this and yet the indexes are just around their all-time highs.
Did I mention that the Fed seems stuck in the mud? It’s true. The Fed Funds rate is unarguably restrictive and the Fed seems to be making every excuse possible to hold off on further rate cuts Except for the 2 dissenting FOMC members. Month-to-date, Fed talk has leaned more hawkish than dovish. The Fed, you see, is stuck in a bit of a pickle. Unemployment may be weakening and inflation is increasing. That makes it hard for the Fed to address one without making the other worse. The Fed is paralyzed by the prospect that inflation from tariffs may respark the painful inflation the US suffered in 2021-2023. FOMC members are therefore reluctant to lower rates further. The problem is, if the Fed does not stop the bleeding in employment, we could end up with stagflation. People don’t buy stuff when they don’t have jobs–it’s simple. I don’t want to get off track here, but the Fed’s blunt tool for inflation–Fed Funds–will have little effect on the root cause of tariff-based inflation. Fed Funds only impacts Demand-based inflation–not supply. Rate cuts could urge consumer-pull inflation higher, but that is likely to be dampened by higher prices. Despite what many people think, consumers buy less goods when prices are high. All that said, markets are very eager to get 2 Fed Funds cuts by year end, and that seems like a tall order given the body language of FOMC members lately–right or wrong.
So, we have all those macro factors along with an angry Fed standing in the way of the markets’ progress. AND–now that you know–seasonal factors that will only be more of a drag, especially next month, the height of the seasonal drag period.
The week ahead can prove to be a pivotal one. To start, the week will end with Powell speaking at THE central bank confab at Jackson Hole. This is an event that has seen some raucous behavior before. Not on the golf course or bars, but at the podium where the usually tight-lipped Chair has hinted at policy changes in the past. Traders are surely hoping that the Fed Head will at least signal a shift ahead of next month’s FOMC meeting. I am skeptical that we will get anything more out of Powell who is likely to keep as much dry powder for next month’s meeting as possible.
Leading up to Powell's speech, we will get housing numbers, FOMC meeting minutes from their last meeting, a now-increasingly-important weekly jobs number, and flash PMIs. And all this is coming off a week that saw new all-time highs on some indexes amidst a backdrop of mixed inflation numbers. Also in the week ahead, we will have earnings announcements from many of the index's top retailers. From them, we are likely to get an interesting tariff data point, not only on the rising costs from inflation, but also if they plan to pass those costs on to consumers.
The next FOMC meeting will happen in just under a month from now, right in the middle of the potentially worst-performing month of the year. Earnings will be behind us, so markets will rely heavily on economic releases to inform next moves. The important ones include two more inflation releases (CPI and PCE) and one monthly employment snapshot. Those will heavily influence the Fed’s next policy decision. Right now, we are very much in the eye of the hurricane when calm can be very deceiving. No, I haven’t forgotten to take down the hurricane flags yet, we still have a long way to go before hurricane season ends in November.
FRIDAY’S MARKETS
Stocks swooned on Friday capping off a winning week for the indexes–a breather may have been in order. Retail Sales came in slightly weaker than expected and University of Michigan missed estimates with a lower-than-expected print. Bond yields gained as investors lowered rate-cut expectations.
NEXT UP
NAHB Housing Market Index (August) may have improved slightly to 34 from 33.
Michelle Bowman will be on Bloomberg later today. I was there this morning bright and early–check out our Instagram–we will post links to the interview later today. However, what Bowman says is far more important, as she was one of the two FOMC dissenters that wanted rate cuts.
Later this week we will get some important earnings from retailers along with housing numbers, regional Fed reports, flash PMIs, and Leading Economic Index. They all have the potential to be market movers. Download the attached calendars to be ready if the storm comes our way.