August 2024 Market Update

What a wild month August has been. Starting the month off with the S&P500 declining (-7.55%) in a matter of three days, from 5537 down to 5119, after the market was spooked by a weak employment number on August 2nd. The unemployment rate moved up to 4.3%, the stock market sold off, and financial/economic academics and media pundits were quickly calling for the Fed to deliver emergency interest rate cuts.

Calls for emergency interest rate cuts are precarious, given many market participants were blaming declining stock prices on the unwinding of the yen carry trade, after the Bank of Japan raised interest rates in July for the first time since 2007, up from 0% to .25%. The yen carry trade, whereas investors leverage Japanese government bonds at 0% interest to purchase U.S. growth stocks, has begun to unwind and will likely continue to unwind as the Fed cuts interest rates in response to weakening employment while the spread between Japanese government bond yields and U.S. government bond yields declines. The chart below depicts how throughout history as the yield spread declines, U.S. unemployment rises.

On August 5th, after the ISM non-manufacturing index reported a positive surprise of 51.4 for the month of July, up from 48.8 from the June reading and back above the contractionary level of below 50, the S&P500 bottomed and rallied with a vengeance. The market has since regained all its losses, even after the bureau of labor statistics (BLS), reported the largest revision to jobs data in U.S. history. The BLS overstated job gains over the previous twelve months, between April 2023 and March 2024, by 818,000 jobs,. Most of these revisions were private sector job revisions. Which means over the past year approximately eighty percent of jobs created were in government, education and healthcare. Non-cyclical sectors of the economy, fueled by government spending.

As the market anticipates the Fed to begin cutting interest rates next month at the September FOMC meeting, the neutral interest rate is expected to be 200 basis points lower than where the Fed currently is. This means the federal funds rate should decline to 3.25% from 5.25% by the end of the interest rate cutting cycle, which is where two out of the three measures of the Atlanta Fed Taylor Rule prescriptions already suggests interest rates should be.

The Fed could take this opportunity to steer itself away from appearing political by acknowledging its human decision-making errors, such as setting banks interest rates to zero while buying $40 billion dollars a month of mortgage-backed securities as housing prices rise forty percent, by guiding the Fed toward adopting a rules-based approach to setting interest rate policy, such as the Taylor Rule. Planning in the overall economy could become much easier in a rules-based system, non-reliant on human decision-making errors which lead to manipulating interest rates for banks, private equity firms and political agendas.

It appears as though through the long term process of manipulating interest rates and disincentivizing saving, Americans are actually paying for stock and real estate prices and valuations to remain elevated. Interestingly, since the American home ownership rate peaked in 2005, a few years after the start of the war against terrorism and massive government debt accumulation, gold has outperformed the S&P 500. It is very interesting that over the past twenty years, on a time period and annualized basis, the performance of real money (gold) has beaten the performance of the benchmark stock market index. We believe this data partially reflects a declining American standard of living and provides evidence that monetizing debt, printing money and handing out fiscal stimulus directly to households, does not improve Americans standard of living.

On the economic front, the data suggests the economy shifting into a strong deflationary environment in the months ahead. The personal savings rate, wages and salary disbursements and employment all continue to grind lower. The JOLTs data, which measures the hiring rate, fell to the lowest level in over a decade in July. An area we are closely monitoring is mortgage purchase applications. Lower interest rates in response to rising unemployment may not bring the desired effect markets currently expect. While refinance applications have risen as mortgage rates have declined below 7%, mortgage purchase applications appear to be slow to respond and may indicate growing concerns from the consumer about their employment and savings situations.

The Fed is prepared to cut interest rates because employment, wages and liquidity are in decline and there is currently no path in sight to generate new employment and income growth to boost spending. Two year interest rates appear rich and ready to lead the federal funds rate lower in the months ahead.

The 10 year minus 2 year yield spread is now entering dis-inversion, which is historically when U.S. recessions begin. Our concern for the upcoming economic period is the hiring rate. Once companies really begin to shed jobs, it is not clear how or how quickly the market will be able to bring them back. With the U.S. in a negative net national savings situation, more government interference and spending could exacerbate an already declining employment situation in a recession.

For the reasons mentioned above, our recommendation since January of 2023 has been to position portfolios to endure a recession, in a defensive manor, risk off and in cash, T-bills, money market funds, fixed income duration extended in September 2023 from 0-5 year to 0-30-year U.S. Treasury bills and notes, 10-year minus 2-year yield curve re steepening and select low duration U.S. equities.

Getting paid to wait for growth assets to be priced at discounts, while being positioned to benefit from bond price appreciation as interest rates decline from downward economic pressure, continues to be a profitable and rewarding strategy. We remain patient and focused on managing risk through 2024.

Disclosure: Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results. This letter is not intended to be relied upon as forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Macrovex Capital, LLC to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projection, and forecasts. There is no guarantee that any forecast made will materialize. Reliance upon the information in this letter is at the sole discretion of the reader. Please consult with a Macrovex Capital, LLC financial advisor to ensure that any contemplated transaction in any securities or investment strategy aligns with your overall investment goals, objectives, and tolerance for risk. Additional information about Macrovex Capital, LLC is available in its current disclosure documents, Form ADV and Form ADV Part 2A Brochure, which are accessible online via the SEC’s investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using CRD #300692. Macrovex Capital, LLC is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting or tax advice