US Strategy Weekly: Awaiting the Debate

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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