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The macrocast™ score for August has risen from last month, indicating a low likelihood of a recessionary bear market. However the microcast™ signal has shifted to a neutral allocation, down from last month’s aggressive reading. This change reflects the recent weakness in technicals and market price action. Together, these risk models imply that while the underlying economic fundamentals are positive, risks are more balanced following the recent selloff.
The Sahm Rule indicator flashes recession warning. The Sahm Rule has been a topic of discussion in the financial media for its strong track record of triggering prior to recessions. The rule, named after the economist Claudia Sahm, measures labor market conditions and warns of a recession when the three-month average of the unemployment rate increases by more than 0.5% from its trailing low. (Chart from SoFi, Bloomberg)
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While the uptick in the unemployment rate is concerning, it’s encouraging to see residential construction payrolls making new highs. Housing plays a pivotal role in the U.S. economy, not only generating employment but also fueling demand in other critical sectors, such as manufacturing and retail. As such, the strength of this sector often serves as a reliable leading economic indicator. Historically, a decline in residential construction payrolls has signaled an approaching recession, with this trend holding true for the past 40 years—except during the pandemic. The fact that this metric is currently reaching new highs suggests ongoing strength in the housing market, which bodes well for the broader economy. (Chart from 3Fourteen Research, recessions marked in red)
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Generally, services have seen much sharper price increases compared to goods. While some items, like electronics, have become significantly cheaper, these savings are outweighed by the rising costs of big-ticket essentials like housing and health care. (Chart from Mark Perry)
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The Federal Reserve is poised to cut rates in September, following its most aggressive rate-hiking cycle in decades. This upcoming shift signals the start of a rate-cutting cycle, which should help reduce borrowing costs across the economy. Globally, central banks have already begun slashing rates at the fastest pace since the pandemic, underscoring a broad trend toward easing monetary policy as inflation continues to decelerate. (Chart from Bank of America)
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The stock market typically responds positively to interest rate cuts, provided the economy doesn’t slip into a recession. Historically, average returns were north of 15% a year after the first rate cut in non-recessionary environments. (Chart from iCapital)
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During the Presidential election, the market tends to rise regardless of which party occupies the White House. Presidents don’t control the market. Historically, the market has risen regardless of who was in office. In the two presidential terms where the market performed negatively, geopolitical and economic factors were the primary drivers of the poor market returns—not the sitting president. (Chart from YCharts)
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Staying invested is more effective than aligning your strategy with a political party. Historically, the stock market has performed better under Democratic presidents compared to Republican ones, but this difference is largely insignificant. The most successful investment strategy, by far, has been to stay invested continuously, regardless, of which political party is in power. (Chart from LPL)
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The late summer months tend to be a seasonally weak period for the stock market. August, specifically, has historically been marked by geopolitical uncertainty and market volatility, which can unsettle investors. Despite any near-term seasonal weakness, it’s worth noting that the market has consistently managed to recover and eventually reach new record highs. (Chart from Carson)
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Sharp selloffs often lead to strong recoveries. The market’s sharp 8% drop in less than a month is reminiscent of previous declines that often led to strong rebound. 12 out of the last 14 similar instances saw the market finish higher three months later. (Table from Bespoke)
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Equities are long-term investments. Equity markets are particularly volatile over shorter time horizons like a day, a month, or even a year. However, the longer you hold your investments, the greater the likelihood of positive returns. Over time, risk is generally rewarded.
(Chart from Bank of America)
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Market pullbacks are a regular occurrence, Part 1. Market declines are common. On average, the market experiences three pullbacks greater than 5% and one correction of more than 10% each year. Bear markets, while less frequent, typically happen about once every three years. (Chart from LPL)
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Market pullbacks are a regular occurrence, Part 2. The S&P 500 has seen double-digit gains this year, yet it experienced an 8% pullback over the past month. This serves as another reminder that while equities can deliver substantial rewards over the long term, those gains often come with short-term volatility and risks. The average decline in a calendar year is 14%. (Data for chart from S&P, 1980 to 8/14/2024)
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Rush Zarrabian, CFA®
Corbett Road, Managing Partner, Portfolio Manager
Corbett Road Capital Management, LLC (“Corbett Road”) is a federally registered investment advisor with the Securities Exchange Commission (“SEC”) and has been in business since 2019. Registration with the SEC does not imply their approval or endorsement of any service provided by Corbett Road.
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macrocast™ and microcast™ are proprietary indexes used by Corbett Road Capital Management to help assist in the investment decision-making process. Neither the information provided by macrocast™ or microcast™ nor any opinion expressed herein considers any investor’s individual circumstances nor should it be treated as personalized advice. Individual investors should consult with a financial professional before engaging in any transaction or strategy. The phrase “the market” refers to the S&P 500 Total Return Index unless otherwise stated. The phrase “risk assets” refers to equities, REITs, high-yield bonds, and other high-volatility securities.
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Individual stocks are shown to illustrate market trends and are not included as securities owned by CRCM. Any names held by CRCM are coincidental. To be considered for investment by CRCM, a security must pass the Firm’s fundamental review process, meet certain internal guidelines, and fit within the parameters of the Firm’s quantitative models.