In with a roar, out with a whimper.
That was August. A month that began with the worst crash for Japanese equities since 1987 and a record-setting bout of volatility ended with US shares near enough to record highs and the VIX sitting with a 15-handle. Like it never happened.
Headed into the holiday weekend, US stocks were on track for a fourth straight monthly gain and, more notably, the ninth in 10. This is the never-ending story.
The rally that began with Janet Yellen cutting the US borrowing estimate and tipping smaller-than-expected coupon increases at the November QRA is intact.
What can you say? Should’ve bought the dip, I suppose. Always buy the dip.
I say that only partially in jest. The interplay of modern market structure and the post-GFC muscle memory (which says you must exploit rich vols before someone else does) favors rapid “mean reversion,” particularly in the presence of the vaunted “policy put,” which is now back in play.
Beginning in 2022, elevated inflation meant the “Fed put” had to be struck far lower (i.e., further below spot) than it was at any other point over the last 14 years. With inflation now tamed (or at least temporarily subdued), Jerome Powell was free to re-strike the put higher via the Fed’s new, jobs-centric reaction function.
Systematic strategies received a lot of coverage in August for selling then turning right around and re-buying once momentum was reestablished and vol reset lower. Through it all, retail investors never wavered. Global equity funds saw another week of net inflows to close out the month. The near $14 billion haul ($20 billion to ETFs tempered by $6 billion from mutual funds) was the 19th consecutive.
For 2024, global equity funds have taken in a net $386 billion. US-focused funds enjoyed a ninth straight inflow, running their YTD cumulative inflow to almost $234 billion.
The “dumb” money, it would seem, knew just what to do in the presence of a 10% off sale: “Buy. The. Damn. Dip.”
It may not be that simple next month. Remember: September’s cursed. It’s the worst month of the year for stocks, with the back-half being particularly pernicious.
Looking back three quarters of a century, the S&P loses 0.7% in September on average, with a positive hit rate of just over four in 10. (That’s bad.)
Of course, that only matters if you’re into market timing. And as Berkshire’s $1 trillion valuation milestone reminds us: The only strategy with a better track record than “buy the dip” is “buy and hold.”
I’ve thought September (and October) are iffy months because, as 3Q limps underwhelmingly to a close, companies run out of room to sustain their full-year guidance with ever more back-loaded quarterly guides.
This year, 1Q and 2Q earnings came in fine (except for the Megas) and each time, estimates were trimmed less than usual. S&P 500 2024 consensus is stable and 2025 is rising. We all survived NVDA.
Economic data is coming in pretty okay, wealth gap considerations aside, and we may be in a “good news is good, bad news is good” phase. Any dip from a 25-not-50 bp September rate will be bought, I think. Election uncertainty remains high but arguably isn’t getting higher. Israel-Iran-Hezbollah hostilities have been telegraphed for months, if it somehow still surprises, that dip also seems primed to be bought. Somehow I think Xi deigning to meet a mere flunky from the US might hint at some toning down of tensions. S&P 500 looks extended with valuation back to highs, and it is not the Megas driving that, but mid and small continue to look relatively cheap-ish.
2- and 10-year action the last two days signaling a .25bps cut in September, which seems appropriate, given that the job market is holding up and the economy is humming along. A Harris victory in November also will be good for animal spirits and assets in general.