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Dog Days Of Summer

Market Musings

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group


For the first time in quite a while, I've had to do a 180-degree turn on the Market Musings.  The Musings were partially written as the initial reaction by the market to the Fed meeting this week was extremely positive.  Equities surged 1% on Wednesday post-meeting.  Fast forward to today, and it's a different story.  Hence, the Dog Days of Summer.  This week's musings are inspired by the song "The Boys Of Summer" by Don Henley.  The song was actually released in October of 1984, but describes the end of the summer season (end of July through early August) so it's appropriate. Here's some trivia about the song:

  • The song was released as part of the "Building The Perfect Beast" album, which sold more than 3 million copies.  The song reached #1 on the U.S. Billboard charts.
  • The music for this song was originally written by Mike Campbell, guitarist for Tom Petty and The Heartbreakers.  However, when it was played for Petty, he didn't feel the music fit with the album they were recording.  Campbell later played the music for Henley who loved it and wrote the lyrics for the song.
  • Henley once explained that the song is about the California coast as the summer turns into fall (i.e., "Nobody on the roads, nobody on the beach").  He was trying to capture how much quieter the place gets when the weather cools as summer turns into fall.
  • The collaboration between Henley and Campbell worked so well, that Campbell ended up working on several songs on Henley's album.
  • The music video was shot entirely in black and white and won "Video of the Year" at the MTV Video Music Awards (for those of you younger than 35, yes, we used to watch videos of our favorite music on the television).  The director of the video, Jean-Baptiste Mondino was aiming to make southern California look like the south of France.

"Nobody on the road
Nobody on the beach
I feel it in the air
The summer's out of reach
Empty lake, empty streets
The sun goes down alone
I'm driving by your house
Don't know you're not home

But I can see you
Your brown skin shining in the sun
You got your hair combed back
And your sunglasses on, baby
I can tell you my love for you will still be strong
After the boys of summer have gone"

Here's what we've seen so far this week...

Summer's Out Of Reach?  Markets have highly anticipated this week's FOMC meeting to gleam some clue as to when the first rate cut could happen.  While the Fed left the Fed Funds Rate unchanged, Powell did open the door for a September rate cut.  In his presser, Powell stated that the Fed is "attentive to the risks to both sides of dual mandate."  Though the Fed indicated they will still be data dependent, Goldman Sachs stated, "the bar is not very high" on the data needed to cut rates.  On Friday, the Fed Futures for a potential 50 basis points rate cut in September jumped to a high of 71%.  That, along with some soft economic data, stoked recession fears in equity traders on Thursday & Friday.  Not every rate cut by the Fed is the same.  There are "panic" cuts (1987 & 1998) which have typically turned out positive for stocks.  So called "soft" cuts (1995 & 2019) have proven positive for both stocks and bonds.  Then there are "hard" cuts due to some kind of event or looking recession, which are negative for stocks, but positive to bonds.  Soft cuts like in 1995 & 2019 when the economy was not moving into recession, proved good for stocks.  That was the prevailing view this time around, but things may have changed.  So the real question becomes - has the Fed waited too long for the first rate cut or have they timed it correctly?  Obviously, only time will tell.  It is being suggested by some that yesterday's and today's market action is related more to deleveraging as opposed to an economic event.  Regardless, the message from the market is that the Fed is behind the curve.  Thanks, Mr. Chairman...

Are The Boys Of Summer Gone?  On the economic front, it's not all bad news.  The difference between 6 months ago and today is that, back then, bad news was good news and now, bad news is bad news.  Despite today's soft Jobs Report, job quits seem to be trending lower, which is not typically a sign of recession.  The Challenger Job Cuts were lower for the 4th consecutive month and the lowest since August of 2023.  The JOLTs Job Quits also declined for the 4th consecutive month and were lowest since November of 2021.  July's inflation reading is expected to be low or flat.  The Fed's Nowcast is showing a 0.2% increase in July for the Consumer Price Index, which would equate to 3.0% on a year-over-year basis.  That means that inflation would have not changed from the 3.0% reading in June.  If consumers continue to get some relief on the inflation front and were to get a 50 basis point rate cut in the next 16 days, perhaps the Fed will have timed their first rate cut appropriately.  As a reminder, we typically see the National Financial Conditions Index move toward positive territory preceding economic recessions.  So far, that is not the case.  The index is currently at -0.51 and has not shown a trending move higher at this point.  The Financial Stress Index is still solidly in negative territory at -0.60.  A move by either index toward positive territory would be a warning signal.  Consumer confidence is still strong despite months of higher inflation and higher interest rates.  As measured by the Conference Board, consumer confidence is at 100.3.  That reading is associated with a strong consumer.  If the reading were to fall off a cliff, as it did in late 2007-early 2008 or early 2020, that would be another warning signal.  At the end of the day, what we may be witnessing is a Fed that missed the initial run up in inflation early 2021 and they have missed the decline in inflation that started last year.  A correction in Fed policy could ease the tensions on Wall Street.  Again, time will tell.

The Dog Days of Summer...
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Disclosures

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