What You Need to Know
- September is a notoriously choppy month, and the delta variant and expected Fed tapering are compounding the uncertainty.
- I believe the economy is fundamentally strong and inflation will ease.
- Now is a good time to be opportunistic and find companies with exposure to the economic recovery.
September, like August, is a notoriously choppy month in the equities market, with little company news for investors to latch onto. Stock prices are particularly volatile amid uncertainty about delta variant cases spreading, economic growth peaking and the planned tapering in Federal Reserve asset purchases.
After a year of rotations — value outperforming growth from January to May, and then growth making a comeback in May through July — what we have now is a mixed bag with market participants leaning back toward cyclicals.
Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Economic Symposium on Friday delivered almost exactly what the market was expecting: The Fed will likely start to taper asset purchases later this year, possibly in November, if economic activity stays strong.
Powell made it clear that the Fed views inflation as transitory and considers tapering and potential rate hikes as separate and distinct. With no surprises from the Fed and no steady stream of earnings reports until October, expect to see investors jockeying for position this month as they seek opportunities to outperform the market.
Signs of Strength
I continue to believe that the economy is fundamentally strong. The U.S. employment picture has improved markedly. In July, nonfarm payrolls came in better than expected, rising by 943,000, and the unemployment rate declined by 0.5 percentage point to 5.4%. Wages registered an astronomical 4% annualized growth, an increase we haven’t seen in many decades.
The job gains were broad-based across sectors, which will lead not only to continued expansion of GDP, but to more sustainable above-trendline growth in the coming quarters.
The latest Job Openings and Labor Turnover Survey (JOLTS), which tracks data on job openings, hires and separations, showed that job openings hit a series high of 10.1 million at the end of June. Hires rose to 6.7 million, while separations were 5.6 million. The JOLTS “quits rate” increased to 2.7%, a sign that workers are increasingly confident that they can leave their current jobs and find another one.
In addition to job growth and higher wages, persistent pent-up demand is another indication that the consumer remains strong. In July, the Federal Reserve Bank of St. Louis reported that the U.S. personal savings rate was at 9.6%, above the historical average of 5%.
In addition, investors continue to have a record amount of funds in money market accounts — $4.534 trillion, far higher than the average of $2.8 trillion, according to Bloomberg.
While the headline U.S. retail sales number was disappointing in July, down 1.1%, June was upwardly revised to a 0.7% gain. Compared with July 2020, retail sales rose 15.8%.