By: Stash Graham
A news-laden September produced losses across all three major American indices. Developments ranging from a hawkish Federal Reserve to questions about the Chinese corporate credit markets created a wave of selling pressure that persisted from the start of Labor Day weekend. The S&P 500 was down just under -5%, while the Dow Jones Industrial Average was down -4.29%. The technology-heavy Nasdaq was the big loser for the month as the index fell -5.31%, as a rise in interest rates on the long end of the yield curve put long-duration investments in red. Our precious metal gold-tracker position (ticker: IAU) was down -3.24% as the U.S. Dollar generated the most interest from safe-haven investors. The S&P 500’s September performance was the worst monthly return since the infamous March of 2020.
The month of September revealed murky August economic data. The University of Michigan consumer sentiment survey continues to wallow in the low 70s (not a good score). Consumers complained about poor buying conditions (high prices, little supply) and concerns with the delta variant. Speaking of high prices, consumers have reiterated that inflation over the long term (5-10 years) dampens their enthusiasm to buy goods. The consumption of goods is the crucial driver for economic growth in the United States. Unfortunately, projected economic growth in the United States continues to be revised lower. Two months ago, the Atlanta and New York Federal Reserve regional banks and big bank economist teams projected 6-7% economic growth rates for the 3rd quarter in the United States. All of the growth projections for the 3rd quarter have been moved materially lower; for example, the Atlanta Federal Reserve now projects for 3.7% growth of the American economy for the 3rd quarter. On September 3rd, the New York Federal Reserve has decided to suspend their GDP forecast, citing the need “to work on methodological improvements.”
Earnings season has begun for American businesses as they report how their summer months (July to September) concluded. The early returns so far have been relatively mixed. FedEx Corporation, formerly known as Federal Express, the largest transportation/logistics company globally, produced a bottom-line (earnings) miss that shook shareholders’ confidence. FedEx’s shares were down more -9% on the day of earnings as the company reported that increases in labor wages have materially eaten into revenue. Thus the earnings report produced the big earnings estimate miss—higher labor costs paired with difficultly finding workers. Separately, customer discretionary stalwart Nike delivered a top-line (revenue) miss. The company reported supply chain issues that prevented the company from meeting estimated sales targets. Higher marginal expenses in shipping further weighed on revenues. On the day of the earnings release, Nike’s share price fell more than -6%. These are two examples of situations that we warned about in our June letter. Increases in wages and materials could put a lot of businesses’ earnings under pressure. Separately, persistent supply chain issues could prevent multi-national conglomerates from getting out their average amount of product, limiting sales growth. We believe the supply chain issues will be taken care of quickly, not uncertain on higher wages.
As Congress will reach the government debt ceiling in the next couple of weeks, we are monitoring a few different situations that will probably take the back pages of financial news headlines but are as important, if not more. The continued deceleration of projected growth of our domestic economy. Sequential consumer sentiment surveys detail dismay from purchasers of goods due to high prices or lack of availability. Meanwhile, global money supply growth has continued to fall for the better part of this year. As mentioned in previous letters, a contraction in narrow money supply growth typically leads to a pullback in global manufacturing new orders. Since June, we have witnessed continual declines in monthly international manufacturing new orders, which typically leads to weakness in earnings for non-technology, cyclical companies (see FedEx and Nike for possible early examples).
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