Following Powell’s hawkish speech last Friday, investors are not happy. Their concern is that Powell will raise rates more than expected and keep them there longer than expected. Accordingly, investors are looking for signs that either affirm Powell’s plan or might get him to back off. In other words, good economic news is bad, and bad economic news is good for investors. It’s perverse but logical, given that Fed liquidity drives markets. On Thursday, we had a good batch of economic news. Jobless claims fell to 232k. Claims peaked at 261k six weeks ago and are slowly declining.
More good news came from the ISM manufacturing report. The index was unchanged at 52.8 and above expectations for 52.0. More importantly, the employment component rose sharply to 54.2 from 49.9. The problem with good labor news is the Fed is worried that tight labor markets are driving inflation. Not surprisingly, given the new paradigm, the market’s reaction to Thursday’s good news was bad.
What To Watch Today
- 8:30 a.m. ET: Nonfarm Payrolls, August (300,000 expected, 528,000 prior)
- 8:30 a.m. ET: Unemployment Rate, August (3.5% expected, 3.5% prior)
- 8:30 a.m. ET: Average Hourly Earnings, month-over-month, August (0.4% expected, 0.5% prior)
- 8:30 a.m. ET: Average Hourly Earnings, year-over-year, August (5.3% expected, 5.2% prior)
- 8:30 a.m. ET: Average Weekly Hours All Employees, August (34.6 expected, 34.6 prior)
- 8:30 a.m. ET: Labor Force Participation Rate, August (62.2% expected, 62.1% prior)
- 8:30 a.m. ET: Underemployment Rate, August (6.7% prior)
- 10:00 a.m. ET: Factory Orders, July (0.2% expected, 2.0% prior)
- 10:00 a.m. ET: Durable Goods Orders, July final (0.0% expected, 0.0% prior)
- 10:00 a.m. ET: Durables excluding transportation, July final (0.3% expected, 0.3% prior)
- 10:00 a.m. ET: Non-defense capital goods orders excluding aircraft, July final (0.4% prior)
- 10:00 a.m. ET: Non-defense capital goods shipments excluding aircraft, July final (0.7% prior)
- No notable companies reporting earnings
Market Trading Update
As noted yesterday, it was not surprising to see the market attempt an intraday rally with the market very oversold short-term. As we have discussed recently, the break of the 50-dma is important and increases the downside risk to investors. Furthermore, with the MACD sell signal intact, any short-term rallies should get used to reduce risk and raise cash for the time being.
Yesterday’s rally attempt suggests buyers exist at current levels, so a short-term rally either today or early next week to challenge the previous support at the 50-dma will not be surprising. Importantly, if the bulls are to regain market control, the 50-dma needs to be retaken very soon. Otherwise, I suspect the bears will have a shot at retesting the July market lows.
The Dollar is Soaring
The dollar is soaring to the detriment of most other assets. A very hawkish Fed, coupled with rising trade and political tensions with China, is pressuring stocks, bonds, and many commodity prices. More important, from a macro view, many foreign borrowers borrow money in dollars. If they do not hedge their principal and interest payments, they will owe more as the dollar rises. A rising dollar makes interest and principal payments more expensive. In such circumstances, borrowers will protect themselves by paying off the loan, which requires them to buy dollars or just buy dollars to hedge their risk. As such, dollar strength may beget dollar strength.
Bear Market Wealth Management
On Wednesday, we published Bear Market Wealth Management. The article served as a simple reminder that limiting losses in a bear market greatly benefits growing long-term wealth. Unfortunately, we stumbled upon the graph below after we published it. The chart further highlights the benefit of reducing stock holdings in a bear market. As it shows, if one only missed the ten worst days in the last 20 years, their wealth would be double that of a simple buy-and-hold S&P 500 strategy. Realize, however, that sitting out for too long can also be a problem. Missing the ten best days would leave you with half the wealth of the S&P 500 buy-and-hold strategy.
Newmont Mining (NEM) is the largest gold miner sporting a market cap of $32 billion. The chart below shows the price of NEM has been cut in half over the last few months and is back to levels last seen during the covid meltdown in 2020. It is also approaching a major support line. The previous time NEM traded at $40, gold was nearly $300/ounce cheaper than it is today.
Investing in gold is problematic given that real rates are rising and the Fed is very aggressive. Such circumstances have not boded well for gold in the past. That said, NEM and other miners are down much more than gold over the last month or two. Might they be approaching a bottom even if gold continues to decline? NEM has an attractive risk/reward setup, especially with a stop loss limit slightly below the trend line. Additionally, the dividend yield on NEM is up to 5.3%.
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