The Bull Thread

Beware of August? Maybe Not in an Election Year


“August slipped away into a moment in time, ’cause it was never mine.” — Taylor Swift

Let’s get right to the point, August historically isn’t a very good month for stocks. Most people know this and it is factually true, as stocks are down on average during this month since 1950 and the past 10 years, something only February and September can also say. But here’s the catch, and there’s always a catch, stocks have historically done quite well in election years in August.



Here’s a chart we’ve shared a lot lately and it was one reason we expected a surprise summer rally when so many were telling us about yield curves and LEIs as reasons to be bearish. The bottom line is June, July, and August are historically the best three months for investors in an election year and this year has again rewarded them so far.



Here are two charts that show other angles on how stocks historically do well August, again showing if you are looking for a big drop this month, it might not happen.





Let’s be realistic though, this is an election year and you tend to get volatility as the election nears. Think about 2016 and 2020, as both years saw some heavy volatility and weakness ahead of those elections and we don’t think this year will be all that different. September and October tend to be weak, before the usual post-election bounce. Be sure to read Seven More Reasons This Bull Market Has Plenty of Life Left for more on why we remain firmly in the camp that any weakness should be used as an opportunity.



Lastly, we like to say around here that volatility is the price we pay to invest. This chart is one of our favorites and it shows that most years (even the best) tend to have multiple scary moments over the course of the year. Last year is a perfect example, as stocks gained close to 25%, yet had a standard 10% correction into late October that had many investors quite worried and selling. Given all we’ve seen so far this year was one 5% mild correction, we do think the odds at some point before the election are strong that we could see a pullback between 6-8%.

 

The Fed Opens the Door (Wide)


The Federal Reserve’s Open Market Committee meeting concluded Wednesday, leaving target interest rates unchanged, almost exactly a year after raising rates to their current level. In their statement and press conference, the committee acknowledged moderation of the labor market and the move higher in the unemployment rate. Chair Powell went beyond hinting when referring to rate cuts in September, stopping short of declaring it a sure thing. Futures markets quickly placed odds of a September 0.25% cut at 98%.

What difference will waiting until the next meeting make? Well, to be specific, two non-farm payroll reports and inflation data for both July and August. Two more months of data will provide an even more clear picture of where the economy is at come mid-September. Plenty of roars will be heard over the next month and a half, likely begging the Fed to cut interest rates before they are behind the curve, particularly if there is any weakness in economic or inflation data.

Markets rallied strongly into the meeting, as tech stocks recovered from recent struggles despite a worse-than-expected report from Microsoft. Bond yields fell across the curve, with the 2-year (widely followed as a Fed tracker) and 10-year rates dropping nearly 0.08% to 4.26% and 4.05% respectively. As recently as a month ago, both interest rates were 0.30-0.50% higher.



Source: Factset 7.31.2024

Interestingly, a question came up towards the end of Powell’s press conference regarding a central bank digital currency. We’ve fielded questions on the topic before from clients and advisors. Powell had nothing constructive to say about developments in that space. Mentioning that they are always researching different methods payments around the globe, but that “In terms of a CBDC, there is really nothing going on… No one here has decided that it’s a good idea yet”

All eyes now turn to Friday’s jobs number and unemployment report for July. Expectations are for 175,000 jobs created and a steady 4.1% unemployment rate. Any tick higher in the unemployment rate and we will begin to hear rumblings related to the Sahm rule triggering. We believe the labor market is always important to watch, but that economic resilience continues.

 

Chaos Is Normal


“There is nothing new in the world except the history you do not know.” -Harry S. Truman

What a few weeks it has been. A former president was inches away from being assassinated, while the current president was forced out of running again by his own party, even though he won basically all the convention delegates and was quite popular in his party just a month before. Now add in the yen carry trade blowing up, the worst day for the Japanese stock market since 1987, the Federal Reserve (Fed) being behind the curve, and global markets melting down. And this isn’t even bringing up the continued heightened tensions between Russia and Ukraine, Israel and Hamas/Iran, and bubbling tensions between Taiwan and China.

It sounds like a lot and it is, but it turns out chaos is normal. Here’s a chart I created that sums it all up nicely. Amid some of the worst events in history, stocks have continued to eventually move higher, suggesting all those scary times and lower prices were really good opportunities. They sure didn’t feel like it at the time, but they were.



We aren’t saying to ignore these events, as they can indeed cause major issues. Russia invading Ukraine for instance contributed to the major spike in inflation back in 2022 and this spike was behind the bear market we saw in both stocks and longer-term bonds. 9/11 pushed our economy into a recession and the tech bubble bear market likely lasted longer as a result. But the reality is bad news eventually will give way to good news. What that chart above doesn’t show is all the good things that have happened throughout history and it is safe to say they dwarf the negatives.

We could be looking at our first 10% correction of 2024. It is important to remember that 10% corrections happen most years and are more normal than you might think. Even last year, when stocks gained nearly 25%, we had a 10% correction into late October.

 

10 Talking Points About the Recent Volatility


“The stock market is a giant distraction from the business of investing.” -John Bogle

It might not feel like it, but stocks were having one of their strongest and least volatile years ever just a few weeks ago. Now it feels like each day has more worries and more volatility. To help, we put together this list of things to know during this latest bout of August volatility.

What Is Causing the Volatility?
There are three main drivers: a weakening economy, the unwind of the yen carry trade, and the Federal Reserve (Fed) likely being way behind the curve on rate cuts.

Let’s start with the Fed. We’ve been in the camp that inflation was last year’s problem and they should probably have already started cutting. With inflation coming back down quickly, there is really no reason to have rates up over 5%. Leaving rates too high for too long slows the economy and hits small businesses and housing especially hard. Remember, back in 2018 a policy rate of just 2.5% was enough to start breaking the economy? The current economy has endured a 5.5% policy rate for over a year now. The aggressive rate hikes were absolutely necessary to help fight inflation, but the greater risk now is on the growth side.

Last Wednesday the Fed decided against cutting rates, but the stage is set for a cut in five weeks at their next meeting. The odds are increasing that first cut very well could be 50 basis points (0.50%) to make up for not cutting last week. The bottom line, the Fed tends to wait till they absolutely have to do something and once again we think they are behind the curve. Here’s the statement from the Fed meeting that concluded last week (complete with the changes from six weeks ago), which came off more hawkish than most expected.



Source: Federal Reserve Bank, Carson Investment Research 7/31/2024

On top of that, the Japanese stock market outright crashed after the Bank of Japan (BOJ) surprised many and hiked interest rates last week. You see, the Japanese yen has soared more than 10% versus the US dollar in just a few weeks, as the yen carry trade unwound, causing many risk assets to be sold as a result. What’s the carry trade? Traders for a long time have borrowed and then sold Japanese government bonds, due to their very low yields. This is the equivalent to borrowing in yen at Japan’s still ultra-low interest rates. They then took the proceeds and invested them in higher yielding bonds or stocks. But then last week the BOJ surprised markets and increased interest rates for the first time in 15 years from -0.1% to 0.25%. That rate hike sparked fears that the cost of borrowing could quickly become more expensive if the yen continued to appreciate, leading to heavy selling of riskier investments.

In response, the Japanese stock market had it’s worst two-day return ever, including falling 12.4% yesterday, the second worst single day ever (only 1987 was worse).



The third reason for the massive volatility is fears over the US economy slowing, potentially into a recession. At this time we don’t expect a recession, as this is more likely a growth scare, which aren’t uncommon, but it has many worried. Last week we saw disappointing manufacturing data and some high profile earnings misses, and then Friday saw the monthly nonfarm payroll come in low at 114,000 jobs in July, versus a consensus expectation of 175,000, while the unemployment rate ticked up to 4.3%. Those aren’t horrible numbers, but they do suggest slowing economic growth.

We do see some potential slowing, but we also think the reaction to the weaker-than-expected jobs number was overblown. For starters, 1.3 million households and businesses were still without power a full week after Hurricane Beryl. Adding to this, the state of Texas saw initial jobless claims double from the previous month and we saw a historic spike in temporary job losses. Lastly, 461,000 people said they couldn’t work due to weather in July, which was more than 10 times the July average. Seeing all these “one off” factors, we are optimistic many jobs will come back in August.



Things Were Too Good and Too Calm
As good as things were, we were probably due for some volatility. The S&P 500 went nearly 18 months without a 2% decline. Now there have been two 2% declines in nine days and we just missed number three on Friday. But it’s important to remember even some of the best years have a few bad days.



There were also some areas of the market that had become stretched. Technology and AI were all the rage for most of 2023 and the first half of 2024, then they weren’t. We see incredible potential here, but the truth is many of these names likely got ahead of themselves and a market swing the other way was perfectly normal.

How overextended were these areas of the market? Well, there’s an ETF that is based on the Magnificent Seven stocks (think the biggest technology-oriented companies in the world) and that ETF had more than doubled since last spring. This group was ripe for a violent move eventually. Still, don’t forget that the Mag 7 delivered nearly 30% earnings growth this most recent earnings season. These companies have been strong earnings engines—the market just got carried away by its enthusiasm.



Chaos and Volatility Are Normal
Geopolitical worries are growing, along with some of the other worries we’ve already discussed. It is important to remember that most years will have scary headlines and potentially some terrible events. But over time stocks go higher and we don’t think this time will be any different.



We like to say volatility is the toll we pay to invest and we are paying that toll right now, with the second 5% mild correction of the year for the S&P 500 taking place right now. But remember, on average, the S&P 500 sees more than three 5% mild corrections a year and one 10% correction a year. None of them are fun, but they are part of investing.



Some Good News
Things aren’t great, but they aren’t that bad either. Productivity in the second quarter came in much better than expected. We’ve been in the camp that better productivity would be coming and would support better economic growth. As a result of the strong productivity, unit labor costs have pulled back, putting a lid on overall inflation. (Workers are more cost efficient when they’re more productive.)



Source: Bespoke

Earnings have been quite strong, with second quarter S&P 500 earnings expected to be up 11.5%, the best quarter since late 2021. Additionally, forward 12-month guidance continues to move higher, not something you’d expect to see if a major recession were right around the corner.



Time Is on Your Side
They say the stock market is the only place that people run out of the store screaming when things go on sale. Well, there are likely a lot of stocks many people loved a month ago that have become significantly cheaper, but now investors don’t want to touch them. But here’s a secret. Investors who focus on long-term goals have time on their side, and that’s a big advantage over hedge funds and computers.

One of the wisest stock market sayings goes, “It is about time in the market, not timing the market.” Below shows how stocks tend to produce positive gains the longer you hold. Also, imagine the impact from buying when stocks are down (like many are now)? These returns likely only get even better.



Is 2024 Really That Different? Not Yet.
Since 1980, the average year sees a peak-to-trough move of 14.1% and gain of 10.3% for the year. As of Monday, the S&P 500 had pulled back 8.5% from the mid-July peak and was still up a solid 8.7% for the year. Sure it is a far cry from the nearly 19% gain in mid-July, but where we are now isn’t all that bad, or all that different from a typical year.



This Time Is Different
Sir John Templeton said the four most dangerous words in investing are, “This time is different.” Nothing is truly different and nearly everything that will happen in the future has already happened in the past in some form. So what looks different now that could provide a clue on what’s really going on? One thing that is quite different now from other past major times of trouble is the action in the US dollar.

Most times we’ve seen a major risk-off scenario in recent history we’ve also seen investors flock to the safety of the old greenback. Go back and look at March 2020 for instance. Stocks and bonds were hit hard. Even gold was selling off. You know what wasn’t? The dollar, the cleanest shirt in the dirty laundry. Then look at 2022, when both stocks and bonds were having horrible years the first 10 months of that year. You know what had one of its best first 10 months ever? Yep, once again the dollar. Now compare that with what we’ve seen the past few days. The dollar has actually sold off. By contrast, we’ve seen emerging market currencies soar, which is totally inconsistent with a major crash on the horizon. If a major systemic issue was brewing we’d expect to see the dollar finding more of a bid.



Buying Thrusts Suggest More in the Tank
Mid-July we saw multiple buying thrusts, captured by seeing many stocks hitting 52-week highs, also inconsistent with a new bear market right around the corner. According to our friends at Ned Davis Research (NDR), on July 19 the New York Stock Exchange (NYSE) made a new cycle high of the number of stocks at their 52-week high. This matters, as historically the market hasn’t peaked for another 44 weeks after this has happened on average. In other words, it would be quite rare for the number of highs to peak along with the price.



Panic Is in the Air
History tells us to buy when others are fearful. Well, fear is in the air. What is amazing is the S&P 500 isn’t even in a 10% correction yet, but we are seeing some extreme fear. From a contrarian point of view, this could be a bullish signal. It doesn’t mean ‘the lows’ are in, but the odds are good in three to six months stocks will be a good deal higher.

The CNN Fear and Greed Index is flashing extreme fear currently and the Volatility Index (VIX) just soared to one of its highest levels ever. It might not feel like it now, but many investors have been rewarded historically when buying in similar situations.



Source: CNNMoney



Diversified Investors Are Being Rewarded, Finally
Since the S&P 500 peaked on July 16 it hasn’t been fun for stock investors, but did you know bonds were doing very well? It wasn’t that long ago, just in 2022, that both stocks are bonds were down more than double digits for the first time in history. Well, we appear to be moving back to more historical precedent with bonds zigging when stocks zag. In fact, since the S&P 500 peaked in July longer-term bonds were up close to 5%, while stocks were down more than 8%. That is a nice cushion for investors when they need it.



We want to stress seeing bonds act like bonds is something we haven’t seen in a long time. When stocks fell 25% during the bear market of 2022 longer-term bonds fell even more, down 26%. Even during the Regional Bank Crisis in March 2023 when stocks pulled back more than 7%, we saw long-term bonds down nearly 2%. Then during the 10% correction during the fall of 2023 we once again saw long-term bonds down more than 13%. The bottom line is bonds haven’t really helped act as a diversifier the last few years and they finally are again. This is a reason for investors to indeed celebrate, since portfolios tend to be more resilient when diversification is working.

Putting it all together, we look at the current volatility and think this too shall pass. We appreciate the trust you put in our team and we will continue to share our unbiased opinions of what is really happening out there.

 

Election Sensitivities for Small Business
Tue, Aug 13, 2024

Among this morning's economic releases was the NFIB's Small Business Optimism index. The headline number came in above expectations, rising to 93.7 versus forecasts of an unchanged reading of 91.5. While that would still indicate that small business sentiment remains at the low end of its historical range, it did rise to the highest level in more than two years (February 2022).



Looking under the hood of this month's report, breadth across categories was solid with half of the inputs to the Optimism Index rising month over month, two falling, and the remaining three going unchanged. A handful of those gainers like Plans to Increase Inventories, Expected Real Sales Higher, and Expectations for the Economy to Improve were notable with top quartile monthly gains. While there were some big month-over-month moves, most indices remain at the low end of historical ranges. Additionally, there are some areas of key weakness. As we noted in today's Morning Lineup, employment metrics continue to weaken led lower this month by big drops in Compensation and Compensation Plans.



Again, Outlook for General Business Conditions stood out as the category with the largest monthly jump. As shown below, that reading went from a relatively low -25 up to -7. That 18-point jump ranks as the eight largest MoM increase on record with April 2020 being the last time the index rose by as much. Additionally, that leaves the index at the highest level since the last presidential election in November 2020.

It is worth noting that the NFIB data has typically been sensitive to politics (more evidence of this below) with the Outlook for General Business Conditions tending to be stronger during Republican administrations and lower during Democratic administrations. As such, the sharp increase in this index over the past couple of months was concurrent with Republicans gaining favor for winning the upcoming election; a move which has since reversed since mid-July meaning next month's NFIB release could see this index reverse lower as well.



One other area where political sensitivities have been observed is in the Economic Policy Uncertainty Index. Like the business outlook reading, in July this uncertainty index surged to the most elevated level since November 2020. As shown below, that sort of rise is nothing new. With some exceptions, every presidential election year (November to November, denoted by red lines below) has seen this index run higher.



Even though the business outlook has improved markedly, the percentage of firms reporting that it is a good time to expand hasn't benefited. The percentage reporting now as a good time to expand is low at only 5% and up only marginally month over month. As shown in the second chart below, economic conditions get most of the blame for the negative outlook with the political climate ranking second.



Looking back historically, in the chart below we show those same reasons for expansion outlook for those reporting negative or uncertain outlooks combined. Again, economic conditions are by far the most common response, but politics are elevated and rising significantly as election season continues to heat up.

 

What Is It About August?


“What is it about August?” George H.W. Bush after his second consecutive summer vacation was disrupted in August, once when Iraq invaded Kuwait and the other the 1991 Soviet Union coup

Are we having fun yet? Last week saw some of the most volatility we’ve seen in years, with the S&P 500 down 3% on Monday, the worst day since September 2022, only to then see a huge surge on Thursday for the best day since November 2022. In the end? The S&P 500 was down a whole two points and virtually flat on the week.



So is this weakness in August really a big surprise? Well, if we look back at history we shouldn’t be too surprised. Going back to 1990 when Iraq invaded Kuwait, big market-moving news and events have taken place in this month time and time again, from 1997 and the Asian contagion, to 1998 and the Russian default, to 2010 and the European bank crisis, to 2011 and the US debt downgrade, to 2015 and the surprise Chinese yuan devaluation, to the yen carry trade of 2024. Below is a list of those events showing how big drops in August have been perfectly normal. And let’s not forget that as bad as these all felt at the time, we did get past each of them.



The logical question is why? Listen, these big international events often coming up in August could be random, but I do think there could be something to a lot of the big money managers being on vacation this month. Then when big news comes out, you tend to get larger moves than would happen otherwise, as trading teams scramble and emotions are higher than normal with so many away. Whatever the reason, I just like to say I’d rather know than not know that August can be a month with big news.

We don’t need to rehash it all here, but what sparked the losses was worry over the Federal Reserve (Fed) being behind the curve on rate cuts, concerns over the economy slowing, and the unwind of the yen carry trade. We broke it all down in 10 Talking Points About The Recent Volatility. All in all, stocks fell more than 1% on Thursday, August 1, Friday, August 2, and Monday, August 5. That on the surface doesn’t sound very good, but I found there were 21 other times this dubious feat was accomplished, and the S&P 500 was higher a year later 18 times and up more than 22% on average. Not to mention higher three months later 90% of the time!



Let’s think back to last week, when we heard many of the same bears and economists telling us the end was near and a recession was imminent. We continue to expect our economy to potentially slow, but not head into a recession. These mid-cycle slowdowns are perfectly normal and happen in most cycles. Don’t forget our second quarter Gross Domestic Product (GPD) grew at 2.8% and the third quarter is expected to grow close to 3.0% as of now. That sounds like one of the best recessions ever if you ask me

Let’s put 2024 in perspective. So far, the S&P 500 is up 12.0% for the year and it pulled back 8.5% from peak to trough, versus the average year up more than 10% with a peak-to-trough correction of 14.2% on average. In other words, that doesn’t sound all that out of the ordinary. Yes, the year is far from over, but really nothing unusual has happened so far.



I found this one quite interesting. So far, 2024 looks a lot like 2023. Like, a lot like 2023. Who knows what happens from here, but I think it is so important to remember that we saw a 10% correction last year and stocks still gained 25%. So, any more weakness over the coming weak seasonal period of August – October doesn’t mean all hope is lost and a year-end rally is still quite possible.



The last thing I wanted to examine was the action from the Volatility Index (VIX). This is an options-based (complicated) measure of potential volatility over the coming 30 days. Many use it as a ‘fear gauge’ and when it spikes like last week, that shows a lot of fear.

Well, it soared to nearly 66 last week, which was the third highest level ever, with only the Great Financial Crisis (GFC) and the early pandemic sell-off higher. To think we saw this spike in fear and volatility because the Bank of Japan hiked rates slightly is kind of ridiculous when you think of it like that.

But what does a large VIX spike mean? I found there were 92 other times the VIX soared above 50 during the trading day and a year later the S&P 500 was higher 91 times. Yes, many of those took place in clusters. Still the bottom line is when fear was rampant similar to last Monday, longer-term investors needed to focus on the potential positive and contrarian bullish signal this can be.

 

The Highest Yielding Stocks in the S&P 500
Tue, Aug 13, 2024

There are currently 21 stocks in the S&P 500 that have dividend yields above 5%, and there are now 61 stocks in the index that have a dividend yield that's higher than the 3.87% that the 10-Year Treasury Note is currently yielding.

Today we wanted to highlight the two stocks in each S&P 500 sector with the highest dividend yields. Below we highlight the two highest yielders in each sector along with the company's market cap, its year-to-date total return, distance from its all-time high, and next dividend ex-date (if it's been announced). Whether or not these dividends are safe is a different story (yes, we're talking about you...Walgreens), but we hope this is a good starting point for further research!

The sector that stands out the most is Consumer Staples because the two highest yielders in the entire S&P come from this sector. Walgreens Boots (WBA) currently has a dividend yield of 9.8%, while tobacco/nicotine-producer Altria (MO) has a yield of 7.8%. WBA already cut its dividend in half once this year and it still yields nearly 10% because its share price is down 60% year-to-date! Even still, WBA is set to at least make its next $0.25/share quarterly payment after its 8/21 ex-date a week from now. Altria (MO), on the other hand, is yielding 7.8% even though its shares have posted a total return of 30.4% YTD.

The only sector that doesn't have at least one stock yielding more than the 10-year US Treasury is Technology. As shown in the table, Cisco (CSCO) and IBM are the highest-yielding S&P 500 Tech stocks with yields of just over 3.5%.



In addition to highlighting the two highest-yielding stocks in each S&P 500 sector, below is a look at the two stocks in each sector that are down the most from their all-time share-price highs. On average, these 20 stocks are down 78% from their all-time highs.

Two stocks in the Financial sector that remain a shell of their former selves from before the Financial Crisis are the two that are down the most from all-time highs: AIG and Citigroup (C).

 

Seasonality Works! Trade the Cycles & Profit from History



Source: Super Boom (April 2011) by Jeffrey A. Hirsch, Fig. 1.3 p12, 500+ Percent Moves Follow Inflation

Earlier this month when we signed off on the final page proofs and sent the 2025 Stock Trader’s Almanac to press, I took pause to reflect upon the historic seasonal research my late father and founder of the Almanac, Yale Hirsch, accomplished and that we now continue. When Yale published the 1st edition of the iconic Stock Trader’s Almanac in 1968 who would have thought that many of the patterns and trends would still be working today? There have been changes and updates. Some trends have gone to the indicator graveyard while new patterns have emerged.

Perhaps the most quintessential Almanac pattern ever just completed for the second time in Almanac history. Remember my Super Boom forecast for Dow 38820 published in 2011

Look at this chart of the 4-Year Presidential Election Cycle!We first sent this chart to members in July 2021. It guided us through the covid bull market, called the midterm bear, pre-election year bull and current election year strength.



The market continues to follow the trends of our seasonal and 4-year cycle patterns we track and monitor. In our July Outlook, we maintained our bullish outlook for 2024, but cautioned that the market was possibly due for some mean reversion (a pullback) once NASDAQ’s 12-Day Midyear Rally ended in mid-July. NASDAQ did top out on July 10 while DJIA and S&P 500 topped about one week later.

The market has begun to recover in line with historical election year strength in August, but the correction is not likely over. With President Biden stepping aside our Open Field election year is back in play. This does not mean we are heading into the red for the year, but it does suggest the market may continue to struggle over the next few months during the seasonal weak period and leading up to this now more uncertain election. But remember since 1952 there have been “Only Two Losses Last 7 Months of Election Years” (page 80 STA 2024). Any potential September/October market weakness could set up a solid Q4, end-of-year rally, most likely beginning after Election Day.



For over five decades, top traders, investors and money managers have relied upon the Stock Trader’s Almanac. The 2025, 58th Annual Edition shows you the cycles, trends, and patterns you need to know in order to trade and invest with reduced risk and for maximum profit.