Welcome to the 2nd half of September-- the worst calendar period of the year! And the corporate stock buyback blackout just started.
Financial markets are still feeling the sting from their August meltdown, but we just lost an important catalyst for the bounce back when corporate buybacks entered a blackout period on Friday.
Buybacks, which Deutsche Bank says are driving as much as 10% in annual returns for the S&P 500, became the chief source of support for stocks as companies bought the dip after the benchmark started August in freefall. According to Morgan Stanley Investment Management, repurchase volumes surged to three times the normal level.
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There are other reasons to expect elevated volatility over the coming month; the most significant of these will probably be the Fed’s decision on interest rates.
The August budget deficit of $380 billion, announced on Friday, makes the Fed decision particularly important. That August print is up more than 50% from the $243 billion in July, up more than 55% from July, and up 66% from last August. It also happened to be a huge surprise, for it’s about $100 billion more than the median estimate of $292.5 billion.
Monthly Receipts, Outlays, and Budget Deficit/Surplus of the U.S. Government, Fiscal Years 2023 and 2024
You read that correctly. Government spending went into red-lining overdrive last month as outlays hit a mind boggling $686 billion, the highest since March 2023, and higher than only a handful of crisis months during the covid crash. In a year when the monthly budget deficit was meandering along pretty much as you’d expect under the current administration (i.e. drunken sailor spending), somebody had the brilliant idea to spend a metric asston of money in August, presumably to boost the struggling economy in order to avoid a recession right before the elections.
That spending means that gross interest on US debt has surpassed not just Defense spending, but also Income Security, Health, Veterans Benefits and Medicare, and is now the second biggest expense of the US government, second only to Social Security, which is roughly $1.5 trillion a year.
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This makes the Fed’s decision on interest rates this week even more important.
The things that are supposed to happen with 5.5% interest rates after the largest debt bubble in history (e.g. an increase in savings, less discretionary spending, lower financial asset prices, and a slowing economy) haven’t happened yet. We believe that probably means that the Fed’s fight against inflation hasn’t yet been won and very likely isn’t over.
The S&P 500 was on fire last week, climbing every single day, but that positive swing came as traders flip-flopped on whether the Federal Reserve will cut rates by 25 basis points or opt for a more robust 50 basis point cut at the end of its two-day policy meeting on Wednesday. No matter the size, it will be the first rate cut from the Fed since early 2020.
Friday, which was the day the August deficit data were released-- at the highly unusual hour of 5:00 a.m. ET-- saw a significant jump in expectations for a 50 basis point cut. As of Friday afternoon, traders had placed a roughly 49% probability policymakers would commit to that larger rate cut, compared to just a 28% chance one day prior.
It’s significant to note that JPMorgan is the lone large Wall Street bank forecasting a half-point rather than a quarter-point cut. Citigroup had been calling for 50 bps earlier in the week, but they actually revised down their expectation.
According to Goldman Sachs this morning, "We interpret comments from Fed officials just ahead of the blackout period to mean that the FOMC is more likely to cut by 25bp than 50bp at its September meeting this week."
The stock market is at all-time highs, as is our national debt. It’s an interesting conundrum. Personally, I’m of the mind that the Fed intends to support Kamala Harris, so I certainly wouldn’t be surprised by a 50 bps cut. But 25 is probably more appropriate for our current station in the economic cycle, what with all-time high stocks, real estate, and food prices.
Of course, for anybody who forgot that the Fed is indeed totally political, Senators Elizabeth Warren, Sheldon Whitehouse and John Hickenlooper reminded us again this morning when they urged the Fed to lower rates by a whopping 75 bps in a letter to Jerome Powell, to which I say, screw it, if we’re going to play that game, let’s just drop ‘em a whole point. After all, home prices are only rising 6.5% a year.
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If you don’t work with a financial advisor yet, this environment strikes me as a ripe opportunity to engage one.
As we suggested a couple of weeks ago, we were buyers of the most recent dip, and we’ll take some short-term trading gains this week for our retired clients. It’s difficult for non-professional investors to commit the sort of time required for this sort of trading, though; for most investors, trading this week is bound to be difficult.
Nevertheless, being nimble and managing risk are our recommendations for the week. If you’re thinking a singular week probably won’t make a huge difference over the next ten years, you’d be right. But the idea is that an advisor can serve not only to make you a little more money over that time but to also make your life a little less hectic. And this week might be hectic.
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