This week marks the beginning of third quarter earnings season, and it will include four S&P financial companies reporting earnings this Friday. According to LSEG IBES, analysts are forecasting S&P Composite earnings per share to grow 5% YOY this quarter, led by the double-digit gains projected for the technology, communications services, and healthcare sectors. Conversely, energy sector earnings are expected to decline 3.4% and be a drag on S&P Composite earnings and only low single-digit earnings growth is anticipated for the other six sectors. Still, it may not be the results of this quarter that will capture investors’ attention. The guidance for future earnings growth is what may move markets. Keep in mind that while S&P’s third quarter earnings are forecast to grow only 5% YOY, fourth quarter earnings are estimated to increase a healthy 12.5% YOY. With the popular equity indices recently hitting record highs, double-digit earnings growth might be a necessity to keep the current advance in place. Positive earnings guidance will be particularly important since both Dow Jones S&P and LSEG IBES have been cutting earnings estimates for 2024, 2025, and 2026 for the last four consecutive weeks. See page 11. In our view, rising prices and falling earnings are inconsistent, particularly when the market’s trailing 12-month PE is 24.7 times earnings, and the 12-month forward PE is rich at 21.3 times. See page 10.

With this in mind, PepsiCo Inc. (PEP – $170.42) announced third quarter adjusted earnings of $2.31 that were above analysts’ expectations of $2.29. However, revenue growth disappointed in the quarter and the company cut its forecast for annual sales growth stating that price-conscious consumers were opting for cheaper private-label brands and hurting revenue. As a result, PepsiCo now expects annual organic revenue growth to be below its previous forecast of 4%. When banks come into focus later this week, analysts will be concentrating on changes in net interest income. Net interest income, or the difference between what banks earn on loans and what they pay out on deposits, provided a windfall for the sector as the Federal Reserve was raising rates; but September marked a big change after the Fed’s first rate cut since March 2020. Corporate guidance on net interest income, consumer loan delinquencies, office loan reserves, trading, and investment banking activity will be important for the financial sector this quarter and in the quarters ahead.

The source of the market’s recent exuberance was September’s employment report that was much stronger than expected. The 254,000 increase in payrolls and the unemployment rate falling for the second month in a row to 4.1%, pointed to a robust economy. Even the U6 unemployment rate fell from 7.9% to 7.7% in the month.

But the details of the report were not quite as hearty, in our view. The establishment survey indicated jobs grew 1.56% YOY, slightly below the long-term average of 1.69% YOY. Meanwhile, the household survey revealed a weaker employment picture, which in our view, justifies the expected revision to the establishment survey early next year. The household survey has been showing that year-over-year job growth has been less than 1% in each month of 2024. August’s household survey showed employment declined on a year-over-year basis; however, in September, the survey reported job growth improved slightly to 0.2% YOY. This poor job growth is significant because negative job growth is a classic signal of a recession. See page 3.

There has been a focus on foreign-born versus native-born employment this year because of a growing disparity between the two categories since the end of 2019. In the last 12 months foreign-born employment grew by 1.2 million to 31.4 million people; while in the same period, native-born employment fell by 825,000 to 130.6 million. Keep in mind that this data comes from the household survey which is much broader than the establishment survey which only includes workers on a payroll as reported to the state. The total number of unemployed foreign-born residents was 1.4 million in September and the foreign-born unemployment rate was 4.2%. There were 5.2 million native-born workers unemployed in September and the native-born unemployment rate was lower at 3.8%. See page 4.

The ISM nonmanufacturing index rose from 51.5 to 54.9 in September and all components moved higher. The only indices still below the 50 level were employment and order backlog. The best improvement was new orders which rose from 53.0 to 59.4, the highest reading since February 2023. The ISM manufacturing index was unchanged at 47.2, with five components rising and five declining. The biggest improvement was seen in business activity/production, which increased from 44.8 to 49.8, the best reading since May 2024. See page 5.

Employment in the manufacturing index fell from 46.0 to 43.9 and in the nonmanufacturing survey it fell from 50.2 to 48.1. These declines are in sharp contrast to September’s payroll report which was stronger than expected and makes us concerned that September’s payrolls may be revised lower. The ISM backlog of orders was the only other index in the nonmanufacturing survey that remained below 50, even though it increased from 43.7 to 48.3. In the manufacturing survey the backlog of orders was also weak, inching up from 43.6 to 44.1. Overall, the ISM reports suggested a stable economy with good growth in the service sector, stability in the manufacturing sector, but questionable growth in terms of employment. See page 6.

Consumer credit outstanding grew by $8.9 billion in August, underperforming consensus expectations and decelerating sharply from July’s upwardly revised gain of $26.7 billion. Both revolving and nonrevolving credit grew 0.6% in August versus July, and on a seasonally adjusted basis, revolving credit grew 5.4% (down from 10.7% a year earlier) and nonrevolving credit grew 1.2% (down from 1.9% a year earlier). After inflation, revolving credit grew 2.8% YOY and nonrevolving decreased 1.2% YOY. Nonrevolving credit contracted slightly in June, but falling interest rates had a positive impact on mortgage growth in July and August. The importance of consumer credit is similar to that of job growth. Deceleration precedes contraction and contraction is a sign of a recession. See page 7.

The NFIB small business optimism index was 91.5 in September, in line with the 88.5 to 91.9 range it has maintained since June 2022. This made July’s increase to 93.7 a positive “outlier.” September was the 33rd consecutive month of the optimism index falling below the 50-year average of 98. Plans for capex, employment, expansion, and inventories were somewhat lower, but little changed in the month. See page 8. Actual sales changes for small business owners fell from negative 16 to negative 17 in September and actual earnings rose from negative 37 to negative 34. Nevertheless, both remain historically weak. Sales expectations rose from negative 18 to negative 9 in September. With this backdrop it is not surprising that the NFIB uncertainty index rose from 92 to 103 in September, its highest level since data began in 2017. NFIB stated “Uncertainty makes owners hesitant to invest in capital spending and inventory, especially as inflation and financing costs continue to put pressure on their bottom lines.” See page 9.

There were no significant changes in our technical indicators this week. See page 12 to 16. In our view, stock prices should always be supported by solid earnings growth, and this makes third quarter earnings season critically important. However, earnings do not matter in a bubble market and with liquidity flowing due to monetary easing taking place in Europe, China, and the US, the path of least resistance for equities may still be up.

Gail Dudack

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Stock markets are always uneasy about unpredictable or unforeseen events, and this week two appeared, the dockworkers strike in the East and Gulf coasts of the US and Israel’s ground raids of Hezbollah strongholds in Lebanon followed by Iran’s missile attack on Israel. These two issues could prove to be temporary disruptions, but if not, they could just as easily change the economic and political balance of the financial markets.

The International Longshoremen’s Association union (ILA), representing 45,000 port workers, initiated a strike on October 1, 2024, which was its first large-scale stoppage in 50 years. It is estimated that the strike, which impacts half of the country’s ocean shipping, could cost the economy an estimated $5 billion a day. The US Maritime Alliance (USMX) said it offered union workers wage increases of nearly 50%, up from a prior proposal. However, according to CNBC, the union is pushing for a 61.5% pay increase to compensate for recent rampant inflation. What is worrisome is that this strike could create substantial shortages ahead of the holiday season and reignite inflation. The negative impact due to perishable produce could also be significant to farmers, wholesalers, and consumers. Given the potential this has on future inflation, it is not surprising that Federal Reserve Chair Jerome Powell indicated in comments to the National Association for Business Economics that he is not in a rush to lower rates further.

Oil prices, which had been trending lower, jumped 3% following reports that Iran, which backs the Hezbollah group, launched a retaliatory missile launch against Israel. To date, Israel was not aware of any casualties. Iran is the third largest producer of oil in the OPEC+ group and accounts for about 3% of world production. However, this is modest when compared to the US which ranks first with 22% of the world’s production and Saudi Arabia which ranks 7^th, with 11% of worldwide production (according to US Energy Information Administration data). In other words, the real impact of Middle East turmoil on oil production may not be as large as the market perceives, unless this conflict escalates.

And these are not the only potential market-moving events of the week. The first and only Vice Presidential debate is schedule for October 1st and the employment release for September will be released on October 4^th. The August JOLTS report showed that job openings unexpectedly increased by 329,000 in the month after two straight monthly decreases. This could boost job growth in September, but hiring fell by 99,000, and this is consistent with a slowing labor market. Overall, the JOLTS report suggests September’s job number should not disrupt the market.

Tracking the Economy

Some economists are now suggesting that the futures market is expecting too many rate cuts by the end of the year. We would agree, but in September Euro zone inflation dipped below 2% for the first time since mid-2021, and this implies that interest rates could continue to fall in Europe. In general, recent economic data has been mixed, but not weak enough to suggest that another rate cut is imminent.

In August, personal income rose 7.6% YOY, disposable income rose 7.2% YOY, and real disposable income rose 4.7%. Real personal disposable income, or income after taxes and inflation, has been positive since early 2023 and this year has been averaging 4% year-over-year. This has been supporting household consumption. Wages grew 5.5% YOY in August, led by the 6.5% YOY gain for government workers. On the other hand, workers in distributive industries only saw a 3.7% YOY gain in wages in August. Adding to personal income was government social benefits which increased 10.7% YOY in August, a big bump up from the 4.9% YOY increase seen at  the end of 2023. See page 3.

The Fed’s favorite inflation index the PCE deflator increased 2.24% in August, down from the 2.45% pace in July. Energy goods and service fell 5.0% YOY in August versus a gain of 0.4% YOY in July and this was a major factor in headline PCE falling. If data is not rounded it shows that many other categories of the PCE ticked higher. Excluding food and energy, or core PCE, rose slightly to 2.68% YOY in August from 2.65% in July. The services index was up 3.74% YOY, an increase from 3.70% a month earlier. PCE services excluding energy and housing rose 3.3% YOY in August, up from 3.2% in July. And finally, the housing PCE index increased to 5.27% YOY in August, versus 5.24% in July. See page 4. It seems that most of the good news in August’s PCE deflator came from lower energy costs.

In August, existing home sales were 3.9 million units, down 4.2% YOY, and continuing the negative YOY comparisons seen since August 2021. New home sales were 716,000, down from the 751,000 units seen a month earlier, but up 9.8% YOY. These are not new trends, but home prices are currently decelerating, or in some cases declining, and this could be favorable for new buyers but could also negatively impact homeowners. The price of an existing single-family median home was still increasing and up 2.9% YOY, but this was down from the 3.9% YOY gain in July, and the average of 5.1% YOY seen in the first five months of the year. The price of a new single-family home fell 4.6% YOY versus the 1.6% YOY decline reported in July. See page 5.

Politics and Economics

The final revisions to September’s University of Michigan consumer sentiment survey showed a pickup in sentiment with a rise in the main index from 67.9 to 70.1. This came from an increase in present conditions from 61.3 to 63.3 and a rise in future expectations from 72.1 to 74.4. As the November election approaches it is interesting to see the gaping dichotomy in the University of Michigan sentiment indices when shown by political party affiliation. In August, Democrats appear very upbeat with a headline index of 90.9, current conditions at 86.1, and expectations soaring to 94.0. Conversely, Republican headline sentiment is abysmal falling from 52.6 to 47.4 in August (the lowest on record), current expectations fell from 42.3 to 33.5 and expectations declined from 59.2 to 56.3. See page 6.

Valuation As we stated last week, valuation does not support equities, but if this is the start of a melt-up or bubble, equity valuation will not matter. The SPX trailing 4-quarter operating multiple is now 24.8 times, and well above all long- and short-term averages. The 12-month forward PE multiple is 21.3 times and when added to inflation of 2.5%, sums to 23.8, or the top of the normal range of 14.8 to 23.8. By all measures, the equity market remains richly valued and is at levels seen only during the 1997-2000 bubble, the financial crisis of 2008, or the post-COVID-19 earnings slump. See page 7. Equally important, earnings estimates are declining. The S&P Dow Jones consensus estimate for calendar 2024 is $236.67, down $0.59 this week. The 2025 estimate is at $274.73, down $1.89. The LSEG IBES estimate for 2024 may have had a typo last week but is currently at $241.25 down $1.26 from three weeks ago. The estimate for 2025 is $277.28, down $1.43 and the 2026 forecast is $312.92, down $1.45. Monitoring these estimates will be critical as we approach third-quarter earnings season since equity prices have been rising, but right now, earnings estimates are falling for 2024, 2025, and 2026. It is a bad combination.

Gail Dudack

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Immediately after the Federal Reserve lowered the fed funds rate by 50 basis points last week, the debate shifted from when will the Fed cut rates, to what does a 50 basis-points cut mean? The table on page 3 shows all the easing cycles in Federal Reserve history that began with a cut of 50 basis-points or more. Of the 12 prior instances, five of these cuts occurred with a recession already in place (although that may not have been known at the time) and two other cuts preceded a recession by a few months. One 50 basis-point cut, in 1967, was a one-off, and the Fed soon returned to a tightening policy. In short of the 11 easing cycles that began with a 50 basis-point cut, seven, or 64%, were associated with a recession.

However, the current cycle is unique since the economy and inflation have been driven by a combination of trade disruptions and fiscal and monetary stimulus. With these external factors returning to normal, it is possible, perhaps even likely, that the economy will have a soft landing. But in our view, it is also possible that the economy falters badly once fiscal stimulus fades. The key to the economy’s next move will be the unemployment rate. As seen in the chart on page 3, if the unemployment rate continues to rise, the odds of a recession will increase substantially.

Nevertheless, the current backdrop for the equity market is promising. The Fed has begun to lower rates and its balance sheet, despite quantitative tightening, is $7.23 trillion, up 70% from the $4.21 trillion seen at the end of 2019. Plus, liquidity in the banking system remains high. For example, other liquid deposits are $10.58 trillion, down from a peak of $14.0 trillion, but assets such as demand deposits, retail money market funds, and small-denomination time deposits, have been increasing. As a result, banks held $18.8 trillion in liquid deposits for customers as of August 5^th, down only 5.5% from their April 2022 peak. See page 4.

This is good news since liquidity is a key ingredient for a bull market. At present, liquid deposits at commercial banks equate to 34% of total US market capitalization. This percentage is down from the 48% recorded in January 2023, but it is much higher than the 12% to 14% seen at the end of 2019. It is also well above the average seen over the last 30 years, or 22%. Total assets of commercial banks were $23.46 trillion as of September 11, 2024, more than 35% greater than the $17.7 trillion recorded at the end of 2019. See page 5. Overall, the banking system is awash in cash which supports equities, particularly since the Fed is, and is expected to continue to lower short-term interest rates.

What does not support equities is valuation, but if the current rise in stock prices is the start of a melt-up, or a bubble, valuation will not matter, at least in the short run. The S&P 500 trailing 4-quarter operating multiple is now 25.2 times, and well above all long- and short-term averages. The 12-month forward PE multiple is 21.5 times. When this multiple is added to inflation of 2.5%, it sums to 24.0, which is above the top of the normal range of 14.8 to 23.8. By all measures, the equity market remains richly valued and is at levels seen only during the 1997-2000 bubble, the financial crisis of 2008, or the post-COVID-19 earnings slump. But it is worth noting that those prior markets peaked when the 12-month trailing PE multiple reached a range of 27 to 31. In other words, if this is a bubble market, it could move higher. See page 6.

But this may depend upon the results of the upcoming third-quarter earnings season. The S&P Dow Jones consensus estimate for calendar 2024 is currently $237.26, down $0.44 this week, and the 2025 estimate is $276.62, down $1.05. The LSEG IBES estimate for 2024 had a typo this week, but the estimate for 2025 is $278.71, down $0.94, and the guesstimate for 2026 EPS is $314.37, down $0.52. The current pattern of equity prices soaring, while earnings estimates are falling for 2024, 2025, and 2026, is unsustainable and worrisome. This means third quarter earnings results, and corporate guidance, will be critically important for equity investors. See page 7.

Recent data on housing permits and starts for August were favorable and erased all of July’s declines. Existing home sales fell slightly in August and were down 4.2% YOY. The median price of an existing home fell to $416,700, but was still up 3.1% YOY. Months of supply of homes rose from 4.1 to 4.2. However, Moody’s Delinquency Tracker showed commercial delinquency rates are on the rise and in particular, the office sector delinquency rate rose to 9.18%, up from 5.5% in January.

September’s Conference Board consumer confidence survey showed the headline index fall from an upwardly revised 105.6 in August to 98.7, near the bottom of the range held over the last three years. The present conditions survey tumbled from 134.6 to 124.3, the lowest level since March 2021. The expectations index fell from 86.3 to 81.7, but remained above the 80 level for the third consecutive month. Consumers have become more pessimistic about the outlook for business conditions, the labor market, and future incomes. We reported University of Michigan data last week. That sentiment survey showed a small bounce in September, but all three indices — overall, present, and expectations — remained near recessionary levels. See page 8.  

This week China announced its largest stimulus package since the pandemic, which included, among other things, lower central bank rates, lower mortgage rates, minimum down payments on real estate transactions, and a 50 basis point decline in the RRR (reserve requirement ratio). Although analysts warned that the weakness in the economy would require more fiscal stimulus, China’s stimulus program was the catalyst for a global equity market rally. It also triggered a small increase in crude oil prices and a rise in US interest rates. With the 10-year Treasury yield currently at 3.74% and the 2-year Treasury yield at 3.49%, the yield curve inversion has been unwound. And inversions are unwinding in many parts of the world including the UK, Germany, and Canada. Some economists warn that the unwinding of a yield curve inversion represents the most vulnerable time for an economy. This may be true once more. If so, the unemployment rate will be key in the months ahead. See page 9.

The broadening participation in the equity market helped the Dow Jones Industrial Average reach a record high on September 24, 2024. Moreover, the DJIA gained 7.9% in the quarter to date versus the 5% gain seen in the S&P 500. See page 14. Stocks are responding favorably to the Fed’s rate cut and China’s stimulus program and this has resulted in much-improved readings in breadth data. For example, the 25-day up/down volume oscillator is 2.33 and was overbought for seven of the eight days ending September 19, and the last six were consecutive. With many of the indices at or near all-time highs, it is important for this indicator to confirm the advance with an overbought reading lasting at least 5 consecutive days. If the rally which began in October actually was a new bull market advance, it should also include several extreme overbought readings of 5.0 or better, which are typical of the first stage of a major advance. To date, the 4.07 reading is the best seen since December 2023 which is encouraging. This six-day overbought reading was not overly impressive, but it was the best demonstration of volume following prices seen since the end of last year. It is clearly positive for the near-term outlook. See page 11. In addition, the 10-day average of daily new highs is 600 and new lows are 44. This combination of new highs above 100 and new lows below 100 is positive. The NYSE advance/decline line made a new record high on September 24, 2024, confirming the rally. See page 12. In sum, for the first time in a long while, all the broad breadth indicators are uniformly optimistic.

Gail Dudack

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It is finally here. The September FOMC meeting and the long-awaited rate cut by the Federal Reserve. The last rate cut occurred during the pandemic in March 2020. In our view, we will get a 25 basis point cut, but in reality, there is little difference between 25 or 50 basis points, particularly since it is likely to be the first in a series. Moreover, in the last five months the 10-year Treasury bond yield declined 100 basis points, providing substantial easing to the economy, and thereby doing some of the Fed’s work for it. In fact, the 10-year Treasury yield is more important than the fed funds rate to many homeowners and home buyers since mortgage rates are linked to the Treasury yield.

What a Cut Helps or Does Not Help

Credit card, or revolving credit rates are loosely linked to short-term rates so this should have a positive impact. But a 25 or 50 basis point cut will hardly be noticed by consumers since the average interest rate on retail store credit cards recently hit a record high of 30.45%, according to a new Bankrate study. The annual percentage rate (APR) on a credit card is the cost of borrowing, and it refers to the yearly interest rate paid on any balances, plus any fees. For example, the APR on the popular Costco Wholesale Corp. (COST- $897.27) Anywhere Visa card is currently 20.49%. So, while market watchers are eagerly waiting to see if the Fed moves 25 or 50 basis points, we believe there is little difference to consumers or the economy. Nonetheless, it is worth noting that revolving consumer credit reached a record $1.36 trillion in July and credit card delinquencies hit 3.25% in the second quarter, the highest since June 2011. There clearly is financial stress in many households and this is why the Fed needs to begin to ease.

Moreover, lowering the fed funds rate will definitely help the federal government deficit since 21% of outstanding marketable Treasury debt is currently held in short-term bills. By lowering short-term rates, the Federal Reserve will lower the government’s net interest expense. And according to current White House data, in 2023, the government’s net interest expense was 9.5% of total spending, extremely high when compared to the 9.9% of total outlays spent for defense and international.

Statistics on how the stock market reacts to an initial fed funds rate cut are quite mixed, although the market tends to decline on the day of the rate cut. Historically, the first rate cut occurs when the economy is already in a recession, although it may not have been known at the time since recessions are identified with a six-month lag. The one easing cycle that occurred prior to a recession was in June 1989, however, this cut was followed by a recession as well, but not until July 1990. Moreover, inflation of 6% or greater has also been followed by a recession, although it may take years to materialize. See page 3. In short, this cycle is unusual in many ways. And while the stock market believes we are headed for a soft landing and no recession, this means investors believe it will be different this time. We hope so but are not convinced that the economic cycle has been eliminated.

A Mix of Data

August data showed the CPI rose 2.5% YOY, down from 2.9% YOY in July. The PPI rose a mere 0.2% YOY versus 1.8% in July. The PCE deflator for August will be reported later next week, but it rose 2.5% YOY in July, unchanged from June. Core indices were less impressive. Core CPI rose 3.2% YOY, unchanged from July. Core PPI showed prices rising 2.3% YOY, up from 2.1% a month earlier. Core PCE for July was 2.6% YOY, virtually unchanged from June and May. In sum, the data remains mixed. See page 4.

Gasoline, and most fuels, were down at least 10% YOY in August, and this helped lower headline inflation in the CPI. Nevertheless, there were trouble spots in the report. Service sector inflation was 4.8% YOY, down from 4.9%. Services less rent rose 4.3% versus 4.6% in July. Transportation services pricing rose 7.9%, down from 8.8%. Auto insurance increased 16.5%, down from 18.6%, but still incredibly high. Health insurance rose 3.3% YOY, up from minus 0.6%. Hospital services rose 5.8%, down from 6.2%. Last but far from least, electricity rose 3.9% YOY, down from 4.9% YOY in July. Most of these indices were down from July levels, but still well above 3% YOY, and most importantly, these all represent necessities of most households. See page 5.

The National Federation of Independent Business indicated that its small business optimism index fell in August from 93.7 to 91.2, erasing all of July’s gains. Uncertainty rose from 90 to 92, reaching its highest level since 98 recorded in October 2020 during the pandemic. Eight of the 12 components we monitor fell during the month, two were unchanged and two rose. Job openings rose 2 points to 40 and plans to raise prices rose one to 24. See page 6.

As unemployment rises, small business owners tend to see weaker sales and that trend may be starting. With the unemployment rate moving above 4% we find that more businesses are reporting that weak sales are a major problem. However, inflation still ranks as the number one problem for a majority of businesses. While small business capital expenditure plans inched up to 24 in August, hiring plans fell two points to 13. Sales expectations plummeted from minus 9 to minus 18. Actual sales changes were unchanged in August at minus 16 but actual earnings fell from minus 30 to minus 37 in August. See page 7.

Conversely, initial statistics for September’s University of Michigan consumer sentiment index showed an increase from 67.9 to 69. This was a result of gains in both present conditions, up 1.6 points to 62.9 and expectations, up 0.9 points, to 73. Yet despite these gains the University of Michigan readings remain near recessionary levels. Conference Board consumer confidence indices for September will be released next week. See page 8.

The National Association of Realtors housing affordability index for July rose two points to 95.0 but it still remains below May’s level. The small increase was in line with a small decrease in the Federal Housing Finance Agency (FHFA) mortgage rate from 7% to 6.93%. The National Association of Home Builders confidence index rose for the first time in five months from 39 to 41. Single-family home sales rose from 44 to 45, expectations for the next 6 month rose from 49 to 53, and traffic of potential buyers from 25 to 27. Overall, these reports suggest the residential housing market remains sluggish but could be showing some green shoots. See page 9.

Retail sales for August surprised to the upside and rose 0.1% month-over-month while analysts were looking for a decline. On a year-over-year basis total retail sales rose 2.1% YOY, below the 2.9% seen in July and the 12-month average of 2.9% YOY. However, real retail sales fell 0.4% YOY, marking the 20^th time in the last 30 months that real YOY sales were negative. Unit vehicle sales fell 4.4% in August and were down 1.3% YOY. In general, vehicle sales have been trending lower since the April 2021 pandemic spike. See page 10. There were important changes in market breadth this week. The 25-day up/down volume oscillator is 4.07 and has been overbought for five of the last six days. With many of the indices at or near all-time highs, it is important for this indicator to confirm the advance with an overbought reading lasting at least 5 consecutive days. If the rally which began in October actually was a new bull market advance, it should also include several extreme overbought readings of 5.0 or better, which are typical of the first stage of a major advance. To date, the 4.07 reading is the best seen since December 2023 which is encouraging. This is the best demonstration of volume following prices seen since the end of last year.

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Tonight is the first presidential debate between Vice President Kamala Harris and former President Donald Trump, and with any luck there will be another debate before the election. But either way, this debate has the potential of being a significant and market-moving event. Hopefully, the discussion will focus on foreign and economic policies and give voters clarity on the vision each has for dealing with budget deficits, burgeoning sovereign debt, immigration, crime, social issues, and America’s role in the conflicts seen in Europe and the Middle East. But few presidential debates are remembered for policy. Most debates are remembered for those special “gotcha” moments and since both candidates have the potential to create such moments, we expect the presidential debate could be entertaining, but also challenging and decisive for both candidates.

The debate comes at an interesting and uneasy time. There is a potential hurricane threatening the Gulf Coast of the US, yet the WTI future (CLc1 – $66.25) is breaking below key support in the $68-70 level. This may be due to weakening demand from China and a growing bearish sentiment in commodity markets, but it is ominous. In line with this, the 46 basis point decline in the 10-year Treasury bond yield since the end of August is a big drop in a short period of time and it suggests a global flight to safety. In response to these declines in energy prices and long-term interest rates we are making a shift in our sector weightings and lowering the energy sector from neutral to underweight and raising utilities from underweight to neutral. See pages 14 and 20.

Technology leaders continue to be under pressure with Apple Inc. (AAPL – $220.11) ordered by the European Commission to pay 13 billion euros in back taxes to Ireland. This news follows a less-than-exciting iPhone 16 release earlier in the week. The European court also threw out Alphabet Inc. A Google unit’s (GOOGL.O – $148.66) appeal against a 2.42 billion euro fine as it cracks down on Google’s anti-competitive practices in Europe. And later this week the Bureau of Labor Statistics will report the CPI, PPI, and import/export price indices for August. These reports may not prove to be as important as the debate, but they do set the stage for the long-awaited September FOMC meeting at which we expect the Fed will cut rates by 25 basis points.

In our view, the Fed’s first rate cut may be a negative for equities based on the classic “sell on the news” mentality of Wall Street. Moreover, a US rate cut could result in more unwinding of the yen carry trade if it weakens the dollar relative to the yen. If so, it would be the mirror image of the yen strengthening after the Bank of Japan raised interest rates to 0.25% on July 31, 2024, the highest level since 2008. In short, be prepared for more volatility in September.

Meanwhile, the employment report for August reflected weakness. Total nonfarm payrolls increased by a seasonally adjusted 142,000 jobs, greater than the three-month average but below the 12-month average of 197,000. Revisions to employment in June and July showed job growth was 86,000 lower than previously reported. The job gains seen in August occurred primarily in construction, up 34,000, and healthcare, up 31,000. The participation rate was unchanged at 62.7 in August. See page 3. There has been a large disparity between the two employment surveys — establishment and household — over the last twelve months. And as we show on page 4, the household survey shows a decline of 64,000 jobs since August 2023, whereas the establishment survey indicates job growth of 2.4 million. See page 4. Some of this disparity will be resolved with the benchmark revision expected early next year; but in our view, the monthly jobs number has been overstated for much of 2024. See definitions of the two surveys on page 5.

The unemployment rate for August fell from 4.3% to 4.2%, but that is not the real story. Workers with less than a high school diploma saw their unemployment rate rise from 6.7% to 7.1%, nearly three times the 2.5% rate for those with a bachelor’s degree or higher. However, the number of unemployed workers this represents is 667,000 with less than a high school diploma versus 1.64 million with a bachelor’s degree. Nevertheless, it displays the story of the haves and have-nots in this economy and why consumer sentiment readings have been so weak. See page 6.

August’s gain of 142,000 jobs was a big improvement from a month earlier, but the 1.5% YOY gain in jobs that this represents is below the long-term average of 1.69% YOY and below average for the third consecutive month. The 3-month moving average of job growth also fell from 141,000 to 116,330. The employment-population ratio was 60.0 for the second month in a row, which is down from 60.4 a year earlier. We believe the retirement of the Baby Boomer generation has been and will continue to be the driver of a long-term decline in this ratio. See page 7. The number of multiple job holders was 8.2 million in August down from 8.4 million in July, but not much lower than the record 8.7 million seen in December 2023. All these monthly readings were well above the long-term average of 7.5 million people. Multiple job holders materialize for many reasons, but most often due to financial stress. This is likely due to the increase in inflation seen in the last three years and the financial hardship this poses to many households. See page 8.

Average hourly earnings for production and non-supervisory workers were $30.27 in August, up 4.1% YOY, and up 1.1% YOY after inflation. Hourly wages have been consistently growing above the rate of inflation since March 2023 which is a positive; however, average weekly earnings were $1020.10 in August, up 3.75% YOY, and up only 0.8% YOY after inflation. Wages have edged out inflation by a mere 0.7% per month since May 2023. This is because average weekly hours were 33.7 in August, down from an average 33.8 hours in 2023 and below the average of 34.0 hours in 2022. See page 9.

BLS data on foreign and native-born employment shows that foreign-born employment has risen from 16.2% of total employment in June 2020 to 19.6% in August. In the 12 months ended in August, foreign-born employment increased by 1.24 million while native-born employment fell by 1.3 million. Since the end of 2019, foreign-born employment grew by 4.4 million and native-born employment declined nearly 1.6 million. For definitions of native and foreign-born, see page 10.

The latest reading for the ISM nonmanufacturing index was 51.5, ratcheting up from 51.4 in July, and still above this survey’s neutral threshold of 49. However, five of the nine underlying indices fell in the month, the weakest being backlogs which dropped from 50.6 to 43.7. The previously reported ISM manufacturing index also rose in August, but to a still-low level of 47.2, and with seven of its ten components well below the 50 benchmark. More importantly, the longer-term trends in both indices are decelerating. See page 11. With a preliminary reading of Tuesday’s market activity, our 25-day up/down volume oscillator is at 3.0 and right at the border of an overbought reading. With many of the indices at or near all-time highs, it is important for this indicator to confirm the advance with an overbought reading lasting at least 5 consecutive days. If the rally which began in October actually was a new bull market advance, it should also include several extreme overbought readings of 5.0 or better, which are typical of the first stage of a major advance. To date, both have been absent, indicating a lack of persistent buying pressure. See page 16.

Gail Dudack

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