September – Too good to be true?
For a month that is typically the worst performing one of the year for equities, it ended up being just another strong month in a long streak since “liberation day”, fueled by the hope of an interest rate cut and solid corporate earnings.
This all begs the question of how much more can the elastic be stretched before it snaps back? We begin to see cracks in the economy, but the seemingly unstoppable market continues to ignore bad news and keeps climbing to new highs instead.
Data source : Bloomberg
In the United States, a fresh round of tariffs in September, this time mostly on various items instead of countries, did not bring the kind of volatility one might have expected. Of course, the interest rate cut that took place on the 17th was a welcomed tailwind and marks the end of the faceoff between the White House and Fed Chairman Powell. Some of the biggest winners of the month were IBM (+15.9%) on high expectations from their quantum computer, Oracle (+24.4%) followed by high demand for its cloud service, Micron (+40.6%) beating estimates and high guidance, Tesla (+33.2%) following Elon Musks’ compensation package approval.
On the macroeconomic side, US composite PMI figures are down for a third straight month though remains in expansionary territory. Inflation is creeping back up at 2.9% year on year in August. The job market is losing its’ shine, the June reading was revised for a second time to now show the first negative month since the pandemic. In this context, the US inflation remains rather high at 3.8% for Q2. However, October looks to be interesting, with different factors weighing against each other between the government shut down, a worsening job market and an expected further rate cut.
Though Europe has lost some steam, it also ended the month on a positive note. The euro area is hanging on, mind you not by much. PMIs are just north of neutral, inflation had a little hike to 2.2% year on year, unemployment is also slightly worsening, and growth remains slightly positive. Despite all that, the European stock market remains strong.
The current mood is very reminiscent of the FOMO (fear of missing out) and TINA (there is no alternative) time of 2021, when markets were going up just because people were buying for fear of missing the train and fixed income was so uninteresting that there was nowhere else to be. For those who have been around longer, many parallels can also be drawn with the internet bubble.
Our summary recommendations
With short-term US treasury bills now yielding less than 4%, and volatility stable at low levels, preventing us from structuring attractive products, it is ever more important to look at alternatives. For this reason, we have successfully focused on existing and new private market funds recently added to our selection.
Chart of the month
In the next few monthly letters, we will focus the chart of the month on various cracks in the health of the economy we have identified that makes us think that we may be closer to the end of the rally than many think.
This month’s graph depicts the Cass Freight Index, which is a measure of monthly freight activity, widely used by analysts and economists as an indicator of North American economic trends. It has been steadily coming down since the end of the lockdown which saw unprecedented logistic challenges. We are currently at lows only beaten by the internet bubble, great financial crisis and covid pandemic.
The calculation is basically monthly freight expenditures divided by shipment volumes. The current figure shows that we are at shipment levels below the 1990 baseline and a sign of low economic activity. Luckily, tech and service economic activity is not reflected in this index and is making up for the growth in GDP.
Source: Bloomberg
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