Well, one week into September, and it's already living up to its billing as the worst month of the year for the stock market. The Blue Chip filled Dow held up best in last week's risk-off tsunami, slumping -2.9%, while the S&P 500 tumbled -4.3% (its worst weekly performance since March 2023), and the Nasdaq Composite plunged -5.8% (its worst week since January 2022). The Mag7 contingent has been under considerable pressure lately, pushing the Nasdaq Composite to a mere 2.5% above its 200-day moving average. The small-cap Russell 2000 shed -5.7% and is heading back towards an official bear market.

Keep in mind that even with last week's damage, there remains a historically thin margin of safety in U.S. equities relative to many historical fundamental metrics. The market is trading at a 20.5x forward P/E multiple, which is more than 30% above the historical average of 15.7x -  as for the Tech sector, the forward P/E is over 26x compared to its long-term average of 18x. Commodities are trading as though global growth is already contracting (weakness in China is a primary culprit) as oil has erased all its gains for the year, and copper has retreated in 13 of the past 16 weeks. Interest rates The 10-year T-note yield made a fresh nearby intra-day low of 3.65% on Friday before backing up into the close. 

All in all, the equity market looks mired in a state of no man's land as it wrestles with the lack of clarity on several major catalysts:

• Can the soft landing be achieved (most markets are already priced for this outcome), or is today's soft landing a precursor to tomorrow's recession?

•  What will the Fed do come September? How should a 25bps or 50bps cut be interpreted? With futures markets already discounting 100bps in cuts in 2025 and roughly 200bps in cuts over the next twelve months, does the Fed have to do more or less, and how does this change market pricing?

• Who will win the U.S. election, and in what way do the House and Senate fall?

Strong arguments can be made for several outcomes on all these issues and be backed up with data, but to come to a definitive conclusion with conviction is a tall order. We're at a crossroads in many respects, and with that comes indecision. Meanwhile, we've had meaningful technical damage done to the stock market, with the S&P 500 bouncing from the 5,186.3 closing low on August 5th to the nearby high of 5,648.4 on August 30th, failing to take out the July 16th peak of 5,667.2. That is a failed rally, and traders will be focusing on key technical levels over the next several weeks: the 50-day moving average (5,505) was broken, the next level in line is the 100-day trendline at 5,378, and after that, the 200-day at 5,147. If we get down to the 200-day, the August 5th low of 5,186.3 will have been taken out — and that would be a highly bearish signpost on its own.

As for last week's jobs data, nonfarm payrolls rose 142k in August, below expectations, while July's report was revised lower by 25k to 89k, and June's report was revised by 61k to 188k. The 3-month average payroll growth now stands at 116k. The labor market is unmistakably slowing, with the 3-month average for payroll growth down to 116k (see chart below). Keep in mind that slowing is not contracting, and this is what should be expected for this stage of a business cycle with the unemployment rate at 4.2%: job postings have stabilized 12% above their pre-pandemic levels, and claims/layoffs are not spiking like they typically do in a downturn (thanks in part to solid productivity gains which are allowing corporates to hang onto their employees).

Strangely, the 0.4% monthly increase in hourly wages got little attention, while July's 0.2% advance was widely hailed as a sign that wages were under control. They may be since the 2 and 3-month average at +0.3% is in line with Q1 and Q2 averages, and productivity gains are allowing businesses to absorb a 3.5-4.0% increase in wages without sacrificing profit margins. But another 0.4% print in September would get attention.

The other side of the coin is that thanks to wages, growth in aggregate labor income remains solid: the +0.77% jump in August more than offsets July's no gain. On a 3-month basis, labor income (jobs x hours x wages) is up 0.4% (4.7% annual rate) after 0.5% in Q1 and 0.3% in Q2. On a YoY basis, labor income is up 5.0% after 4.8% in July and 5.1% in June, only slightly lower than the 5.3% YoY gains in Q1 and Q2. With PCE inflation having slowed to 2.5%, real labor income growth holds around 2.5%, supporting similar growth in real personal expenditures.

There were a couple of areas of concern in this jobs report that are worrisome should the trends persist. Half of the +142k payroll increase came from government and health/education and nearly half from the nonsensical Birth-Death model. The two-month cumulative downward revision of -86k was alarming and a sign that these data points have huge error terms. In the past year, nonfarm payrolls have been revised down 80% of the time and by a total of -500k.

Two lessons here: first, what you see isn't what you get; second, revisions are procyclical and, along with a lot of other details in both the Establishment and Household Surveys, have recessionary thumbprints. As for the latter, the fact that total employment and full-time job growth are running below the zero line has a perfect track record in predicting recessions. Not to mention that temporary help payrolls contracted again in August, bringing the current maximum drawdown to -15.3%, which is consistent with prior recessions.

While the swaps market is leaning towards a -25-basis point Fed rate cut on September 18th (call it 70% odds per the CME FedWatch tool), they also are discounting 90% odds of a cumulative rate-reduction of at least -100 basis points by year-end (which means that the November or December meetings would have to feature a 50 beeper). The setup for Powell going into next week's Fed meeting is challenging: if the Fed goes -25 basis points, investors might see that as not enough. But if the Fed goes -50 basis points, then questions will arise about "what does Powell see that we don't see?"  How and what he says at the press conference will be very important. Good luck.

What members of the FOMC should be taking note of as it pertains to what Mr. Market thinks is the deep -160 basis point curve inversion between the 2-year T-note yield and the Fed funds rate, which is a spread that has presaged recessions and mega Fed easing cycles in the time in the past  The front end of the curve is telling the Fed that it is at least -200 basis points behind the curve when it comes to inflation and inflation expectations, let alone the pace of real economic activity.

We got comments from two Fed Governors last week following the payroll report and before the blackout window started. Fed Governor Waller and New York Fed President Williams' remarks suggest that the Fed leadership sees a 25bp cut as the base case for the September meeting. Still, they are open to 50bp cuts at subsequent meetings if the labor market continues to deteriorate. Waller said that he expected that "cuts will be done carefully," that the FOMC can act "quickly and forcefully" if "subsequent data show a significant deterioration in the labor market," and that he would be an advocate of "front-loading cuts … if that is appropriate." Williams said that "the stance of monetary policy can be moved to a more neutral setting over time," that the recent data was "consistent with the good labor market that existed in the period before the pandemic," and that the unemployment rate "remains relatively low by historical standards."

I'm going to jump over to an area of the markets and energy industry that I've spent the last seven years following very closely: nuclear energy.  I found the cover of this week's Barron's publication to be timely and on point. It's nice to see the word getting out there and watch this awesome technology's broadening acceptance. 

Truth be told, this year has been a frustrating experience for anyone trying to invest in the space as it's gotten caught up with the weakness in commodities and energy in general.  While the current 35% correction in uranium equities has investors battered and bruised the long-term fundamental case, it has only strengthened.  Last week was the conclusion of the annual World Nuclear Symposium, and access to the event was sold out for the first time on record.  Below is a rather lengthy tweet posted by John Quakes over the weekend, thoroughly laying out the fundamental backdrop of this segment of the energy industry.  For those that don't know him John is on the Mount Rushmore of industry experts when it comes to the nuclear energy industry.  I strongly encourage anyone interested or currently invested in this space to take the time to read through this post and appreciate that while uranium equities may be mired in a nasty correction, the fundamental backdrop underpinning this industry is as strong as it's been in over two decades and maybe ever.      

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