Did you buy the dip?
US equities will head into a very challenging seasonal down around 5.5% over three weeks. As noted here, the current pullback looks almost exactly like April’s stumble in that regard. That dip was a “buy.” I don’t know about this one.
August is the worst month of the year for flows, but folks were still putting money into stocks (on net) into the July FOMC meeting — i.e., in the week to July 31. US equity-focused ETFs and mutual funds took in $4.5 billion over that period.
It was the fifth consecutive inflow, but as the figure shows, the pace is downshifting. Flows were front-loaded in Q3.
Globally, stock funds saw $9 billion of inflows over the week. For the year (i.e., for 2024 YTD), US stock funds have seen around $204 billion of inflows. That’s a very aggressive pace, second only to 2021.
Plainly, the Fed’s going to cut rates in September. Wall Street’s starting to coalesce around the idea of a half-point move and I can’t say I disagree, although I do doubt market pricing for ~125bps of cuts by year-end.
Jerome Powell has said repeatedly that 25bps doesn’t make any difference one way or another, and if the labor market decelerates any further between now and the September FOMC meeting, the Fed likely will want to make a difference with the first cut, as opposed to using it merely for signaling purposes.
The problem for equity bulls is that “first cuts” into hard landings are negative for stocks. The table below is from BofA’s Michael Hartnett, who’s been adamant about selling the first cut for well over a year now. Suffice to say he still thinks the first cut’s a sell.
When the Fed “cuts into a hard landing [it’s] negative for stocks,” Hartnett wrote, in his latest. As the table shows, the S&P typically falls 6% in three months in hard landing cuts. 10s typically rally 38bps over six months (they rallied more than that last week, I’d note, with a chuckle).
What you want if you’re going to buy the first cut is for the Fed’s motivation to be some manner of “Wall Street only” event. As Hartnett put it, “LTCM wasn’t felt on Main Street whereas Lehman was.”
In reiterating his “sell the first cut” call, Hartnett reminded investors that according to the July installment of the bank’s Global Fund Manager survey, subjective hard landing odds were de minimis at just 11%. It’s fair to suggest those odds will be marked up in the August vintage of the poll.
“One very important difference in 2024 is the extreme degree to which risk assets have front-run Fed cuts,” Hartnett went on, noting that stocks are up 32% in the past nine months. The average gain for the S&P into a dozen historical “first cuts” since 1970 is just 2%.
Guess I should have read this before commenting on the #Sahm article. The last paragraph sums up nicely why the long duration aspect of big tech and assumed rate cuts are already priced in for them. In the near term, I’m betting on long bonds, but I would love a 20% pullback as I’m still very bullish long-term on AI. It won’t be great for employment despite the protestations of those who say innovation always creates new jobs, but big tech will reap the rewards with higher profit margins and revenue growth over the long term. I also see AI and white collar displacement as a reason why ZIRP or something close to it will become the norm.
Buying into this is not necessarily a yes/no binary decision. Scaling your buy is often a good practice. Maybe allocate 25-33% of your buying budget now and see what happens…and then make another allocation down the road…
Heisenberg, what was the inflow into bonds (ETFs) vs equities? If such graph exists?
Bond funds in aggregate took in $14.6 billion over the period. Treasury funds took in around $3 billion. UST-focused ETFs and mutual funds have seen inflows for three months straight, consistent with three straight months of gains for USTs as an asset class.
Your context and personal take on this dip has been instructive but I’m finding it a little difficult to buy the big bad bear biting the market into oblivion. If you and Claudia Sahm are correct and this isn’t a Bad Recession, then why shouldn’t the read through for rates come into stocks rather quickly? I caught where you said they are already prices in, but are they already priced out? Like, these wall street narratives give the business news industry something to write about and charge us idiots for the privilege of its contemplation, but doesn’t one narrative’s ascendance telegraph its own demise? We’re all ginned up on the fear now. Is Savita Subramanian preparing her “recession fears overdone” memo?
Perhaps you should follow RIA’s advice in the comment above. It does not have to be all-or-nothing.