Shutdown Watch September is poised to deliver the S&P 500’s worst monthly performance of 2023 -- a 5% drop.
The Nasdaq Composite is down 6.5% with big-cap tech names taking it on the chin (Apple down 10%, Nvidia – darling of AI – down 11%, Netflix down 14%). Even the stalwarts of the Dow Jones Industrial Average are down a collective 3.4%
Hedges have been hard to come by: the long-duration bond fund TLT lost almost 7% for the month; the gold fund GLD clipped for 4%. One bright spot -- the U.S. Dollar.
The Nasdaq Composite is down 6.5% with big-cap tech names taking it on the chin (Apple down 10%, Nvidia – darling of AI – down 11%, Netflix down 14%). Even the stalwarts of the Dow Jones Industrial Average are down a collective 3.4%
Hedges have been hard to come by: the long-duration bond fund TLT lost almost 7% for the month; the gold fund GLD clipped for 4%. One bright spot -- the U.S. Dollar.
What happened?
Early on, Apple weighed on the Nasdaq amid headlines concerning China's ban of iPhone use in government agencies. The market chopped along until mid-month when negotiations between the UAW union and Detroit carmakers - Ford, General Motors, and Stellantis - broke down and the union went on strike, the first time in the union’s 88-year history that all three major automakers were targeted simultaneously. Investors fear that some of the economic impacts of the auto strike may eventually ripple across tech and the chip industry, so down go stocks.
Adding to the gloom -- rising oil prices, which have pushed past $90 per barrel to year-to-date highs. U.S. consumer prices in August rose by their most in more than a year, driven by a nearly 11% increase in retail gasoline prices. The Fed had recently been celebrating some wins on the inflation front, but resurgent energy prices are not helping.
While the Fed didn't hike rates at its FOMC meeting on Sep 19-20, it did forecast higher rates by year-end, fewer cuts in the future, and reiterated the notion of "higher for longer.” In fact, not until 2026 will inflation fall to the sweet spot of 2%, according to the Fed’s latest projections. As you can imagine, this spooked markets. Down go stocks.
Looming Government Shutdown
What could make matters worse? How about this. Funding for the U.S. government runs out at 12:01 a.m. ET Sunday. Unless lawmakers can agree to pass a dozen appropriations bills by Sept. 30, or ink a short-term continuing resolution to fund the government, the U.S. will face its first federal shutdown since 2019.
Not only is this feud among lawmakers bad timing for the economy (and markets), but there’s not a great sense of what the fight is even about. It's a shutdown about nothing. Or, as Neil Bradley, the executive vice president of the U.S. Chamber of Commerce, termed it, it's the "Seinfeld" shutdown.
How is October Looking?
Two schools of thought. September’s ugliness could roll into an October correction. Especially if the government really does shut down and does so for a protracted period. On the other hand, if said shutdown can be avoided, the bad news from September is largely baked into the cake and we could begin to see the markets stabilize and money return to risk assets.
Hints of good news…
Possible daylight in (part of) the UAW strike: Ford reached agreement with Canadian labor union Unifor last weekend and the United Auto Workers union said it had made progress in talks with Ford. That’s something.
After 148 days, the Hollywood writers strike is over, paving the way for late-night comedians to resume skewering pompous politicians and the absurdities of life – of which there are plenty of both.
And For What It’s Worth…
Just four months after announcing that the hot dog-shaped Wienermobile was changing its name to the Frankmobile, Oscar Mayer, the company behind the distinctive ride, is having a change of heart. An avalanche of public comments appears to be the catalyst.
The name change was meant to pay homage to the brand's 100% beef franks and their new recipe. But fans gagged. The company, hat in hand, tried to make the most of the about-face. "It’s been a franktastic summer!" they said in an Instagram post. "But like you, we missed this BUNderful icon. Help us welcome back the Wienermobile!" Article at AP News.
Those of us old enough to remember the 1985 debacle of New Coke understand that there are some things in corporate culture you just don’t mess with.
_____
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
Best always,
David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
Early on, Apple weighed on the Nasdaq amid headlines concerning China's ban of iPhone use in government agencies. The market chopped along until mid-month when negotiations between the UAW union and Detroit carmakers - Ford, General Motors, and Stellantis - broke down and the union went on strike, the first time in the union’s 88-year history that all three major automakers were targeted simultaneously. Investors fear that some of the economic impacts of the auto strike may eventually ripple across tech and the chip industry, so down go stocks.
Adding to the gloom -- rising oil prices, which have pushed past $90 per barrel to year-to-date highs. U.S. consumer prices in August rose by their most in more than a year, driven by a nearly 11% increase in retail gasoline prices. The Fed had recently been celebrating some wins on the inflation front, but resurgent energy prices are not helping.
While the Fed didn't hike rates at its FOMC meeting on Sep 19-20, it did forecast higher rates by year-end, fewer cuts in the future, and reiterated the notion of "higher for longer.” In fact, not until 2026 will inflation fall to the sweet spot of 2%, according to the Fed’s latest projections. As you can imagine, this spooked markets. Down go stocks.
Looming Government Shutdown
What could make matters worse? How about this. Funding for the U.S. government runs out at 12:01 a.m. ET Sunday. Unless lawmakers can agree to pass a dozen appropriations bills by Sept. 30, or ink a short-term continuing resolution to fund the government, the U.S. will face its first federal shutdown since 2019.
Not only is this feud among lawmakers bad timing for the economy (and markets), but there’s not a great sense of what the fight is even about. It's a shutdown about nothing. Or, as Neil Bradley, the executive vice president of the U.S. Chamber of Commerce, termed it, it's the "Seinfeld" shutdown.
How is October Looking?
Two schools of thought. September’s ugliness could roll into an October correction. Especially if the government really does shut down and does so for a protracted period. On the other hand, if said shutdown can be avoided, the bad news from September is largely baked into the cake and we could begin to see the markets stabilize and money return to risk assets.
- Michael James, managing director of equity trading at Wedbush Securities in Los Angeles, says “People were looking for a reason to push the market higher given how over-sold it looks.”
- “We expect the market correction to mature as early as next week,” says Katie Stockton, Fairlead Strategies Managing Partner. And a potential “relief rally” after that.
- “I remind investors,” says Sam Stovall, Chief Investment Strategist for CFRA Research, “that more than twice the number of pullbacks, corrections, and bear markets ended in October.” He adds, “We're in less than the first year of a new bull market.”
Hints of good news…
Possible daylight in (part of) the UAW strike: Ford reached agreement with Canadian labor union Unifor last weekend and the United Auto Workers union said it had made progress in talks with Ford. That’s something.
After 148 days, the Hollywood writers strike is over, paving the way for late-night comedians to resume skewering pompous politicians and the absurdities of life – of which there are plenty of both.
And For What It’s Worth…
Just four months after announcing that the hot dog-shaped Wienermobile was changing its name to the Frankmobile, Oscar Mayer, the company behind the distinctive ride, is having a change of heart. An avalanche of public comments appears to be the catalyst.
The name change was meant to pay homage to the brand's 100% beef franks and their new recipe. But fans gagged. The company, hat in hand, tried to make the most of the about-face. "It’s been a franktastic summer!" they said in an Instagram post. "But like you, we missed this BUNderful icon. Help us welcome back the Wienermobile!" Article at AP News.
Those of us old enough to remember the 1985 debacle of New Coke understand that there are some things in corporate culture you just don’t mess with.
_____
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
Best always,
David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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