Has the Fed Slowed Down the Economy Enough?
What Might September Hold for the Markets?

September 3, 2023

Weekly Market Outlook

By Donn Goodman and Keith Schneider

Welcome Gaugers.  We are glad to have you with us again.  Hopefully, you closed out August in winning fashion (in the markets or your golf game) and you will be taking it easy this holiday weekend (remember it is LABOR related….which means NO LABOR).  We also hope you are spending time with your families and loved ones soaking up the late summer warm weather.

Our hearts go out to you if you, or someone you know, is still dealing with the aftermath of Hurricane Idalia or the aftereffects of the Maui fires (or any weather-related disruption anywhere).  We will continue to keep you in our thoughts and prayers.

Also, thank you to those of you who share your opinion (positive or negative) about any part of our weekly Market Outlook.  We only get better at doing this with your critique, so please keep them coming.  We appreciate the feedback.

As is usual and customary, we have lots to cover so let’s jump right in.

Inflation ticks up.

This past week saw a couple of important economic statistics.  July PCE (Personal Consumption Expenditure Price Index) Inflation was released.  This is the Fed’s preferred inflation measure. It rose to 3.3%, in-line with expectations of 3.3%.  Core PCE inflation rose to 4.2% in line with expectations of 4.2%.  This is the second inflation metric that jumped in July. See chart below:

The inflation battle continues.  Now we understand the “hawkish” rhetoric put out by Jerome Powell at the Fed’s conference two weeks ago.  See chart below:

US Labor Statistics

This is where we are beginning to see a real slowdown.  The JOLTS number came out this past week (the job openings and labor turnover survey). The JOLTS survey showed continued considerable weakness.

In that survey, the job openings rate for professional & business services sector fell from 8.4% in July 2022 to 5.5% in July 2023, which is the largest year/year decline since early 2002.  This was a signal that the economy is beginning to see the slowdown the Fed was working towards.  See chart below:

Jobs report.

This past Friday the August jobs report was released.  Hiring unexpectedly picked up in August as employers added 187,000 jobs despite the recent uptick in inflation and high interest rates.  However, payroll gains over the summer were revised down sharply.  Economists surveyed by Bloomberg had estimated 168,000 jobs would be added, missing the mark by quite a bit.

The unemployment rate, which is calculated from a separate survey of households, rose from 3.5% to 3.8%, the highest since February 2022.  That is because a surge of Americans went into the labor force, which included people working and looking for jobs.

Why?  We think this is partly due to COVID $ running out as well as people beginning to drive up credit to cover many items like food and gas, which are running quite a bit higher than in the past few years.

The Job market is forecasting a slowdown.

Several labor market metrics have been deteriorating for months.  Yet most metrics also confirm that the labor market remains tight.

It is a dynamic that has confused observers.  Even Fed Chair Powell recently acknowledged these are not normal times.  “For example, so far, job openings have declined substantially without increasing unemployment (until this past Friday).  This is a highly welcome but historically unusual result that appears to reflect large excess demand for labor,” Powell said at the Jackson Hole Economic Policy Symposium last week.

The key metric that seems to be driving the current labor market narrative is the ratio of job openings to the number of unemployed people.  As of July, this sat high at 1.5 opens per unemployed person.  While down from its record high of 2x in March 2022, it remains well above the pre-pandemic level of 1.2x.    See chart below:

The participation rate jumped from 62.6% to 62.8%. 

Employers cut 75k jobs in August - the most in 7 months.

Non-farm payrolls are declining (a welcome sight for the Federal Reserve)

The temporary help services segment of non-farm payrolls has declined 7 straight months.  (Another welcome sign for the Fed)

In month over month terms, average hourly earnings growth went from 0.2% vs. 0.4% prior, the slowest growth since February 2022.  See charts below:

Workers on strike.  Besides the strike of a big portion of the entertainment industry (Writers and Actors), the UAW (United Auto Workers) look to be headed for a strike.  Given the high inflation numbers and the tight labor markets, organized labor unions are opting to exercise their muscle right now and are willing and seem able to sit out for an extended period of time.  See the chart below:

Bank of America analysts believe many of the above employment figures along with employers beginning to be hesitant about putting on new workers is pointing to the Fed being done raising rates (the market this past week thought so too)

Other signs of an economic cooling include the US Manufacturing PMI (Purchasing Managers Index) which continues to roll over and now sits below the long-term median 50th percentile line.  See chart below:

Income is falling.  See chart below:

Housing has turned quite negative.

We could write a whole column just on the housing woes.  But for today’s purposes, it is important to include housing in the dialogue because it is having a profound effect on the economy.  Existing home sales is an important component to the economy and more importantly, fulfilling new and existing home buyers’ demands for upgraded houses.  This market has come to a screeching halt.  And you can guess why….rising interest rates and non-affordability in the housing market.  (This is keeping home prices very high as people with low locked in mortgages don’t want to move and this is taking valuable supply off the market)

The real culprit is mortgage interest rates and affordability.  See chart below:

Watch out for Oil.

It is interesting that we have not heard much conversation these past few weeks about the Energy component as oil stocks are quietly moving higher.  I guess the world being caught up in AI this summer has kept the commodity-based sector of oil in the background.

Energy is about to slow down the economy a bit more.  Oil prices at the pump have jumped recently and we are hitting new highs in Oil prices.  More significant is that BRICS (made up of Brazil, Russia, India, China) has invited six new countries including  Iran, United Arab Emirates(UAE),  and Saudi Arabia.  I assure you that between the BRICS and OPEC they plan on curtailing oil production and keeping prices high.  This is what fuels their economies.

Rising oil prices will keep inflation higher. Russia is also trying to keep grain prices high to keep financial  pressure on dollar and the West.  Oil will contribute to the inflation numbers not coming down towards the Fed’s target of 2% anytime soon.  See charts below:

Why is nobody talking about Energy related stocks?

What might the Fed’s next move be?

We think likely nothing for some time as they now realize (and we will show) that there are an abundance of economic signals showing real slowing.  Also, traders are banking on a long pause.

As we are already in the 5.25%-5.50% camp, the numbers above show that we will likely stay there.  However, looking out to future meetings, the above probabilities show almost no chance of a cut in interest rates in 2024.  As we have stated in this column before, interest rates will stay higher for longer.

Maybe this is a return to more normal economic market cycles?  Remember that the stock and bond markets have done well in long periods where interest rates are steady and more normalized, as we are witnessing right now.

What about stocks in September?

Going into September, the technical picture of the S&P 500 has improvedSee chart below:

September Is historically the weakest month of the year

For so many years we have all heard that September is the worst month of the year to be invested.  While September historically has been the weakest month of the year for the S&P 500, there are some reasons to stay the course and not get defensive.

44% of the time September is positive. If it is negative for the month, it averages less than a 1% drop. See chart below:

Typically, the weakness in September comes in the second half of the month.

However, it is important to note that the S&P 500 is above its 200 DMA and just came off a negative month.  This is a positive.  See important chart below:

When the S&P is up over 10% for the first six months and has a negative August (as we just had with the S&P 500 down -1.8% for the month), the rest of the year has been positive 100% of the time historically. See chart below.

Earnings Have Been A Bullish Factor

One more reason for a positive market in the next few months:  earnings are improving.  With talk about an imminent recession off the table right now and increased rhetoric about a “soft landing,” the focus for the market has been about earnings.  The fact that earnings were well above expectations for the 2Q of 2023 also gives us (and investors) the positive input that may help keep the markets up for the near future.  See earnings expectation chart for the next 12 months below:

Why we like quant investing.  (And you should too).

Money managers were wrong in August.  Our algo-based strategies stayed mostly invested and had a really good month of August.  Utilizing rules based, formulaic investing keeps us focused on following the road map.  We don’t have to form an opinion which forces money managers to be reactive and their decisions ruled by emotion, not always facts.  A good example of that is this week’s NAAIM (National Association of Active Investment Managers) chart.  It shows that quite a few money managers went from getting defensive in August to reversing course and getting more bullish as we closed out the month.   See the chart below:

Thanks for reading today’s column.  We now turn it over to Keith and his team and their all-important Big View comments.  Hope you have a good upcoming week.




  • All 4 key US indices reclaimed their respective Bullish market phases this week, and with strong price action over the past 5 days.(+)
  • Positive volume patterns continue to hold up with more accumulation days than distribution days across every major index over the past 2 weeks. (+)
  • Risk-off sectors like Consumer Staples (XLP) and Utilities (XLU) were the only negative sectors this week while there was significant outperformance in speculative sectors like Semiconductors (SMH), Technology (XLK), and Retail (XRT). (+)
  • Homebuilders (XHB) looked to be digesting higher rates and soared this week, leading all other major market sectors. (+)
  • The McClellan Oscillator continues to hold up and remains bullish for both the S&P 500 (SPY) and Russell 2000 (IWM). (+)
  • The New High / New Low ratio exploded on both short-term and long-term timeframes for both the S&P 500 (SPY) and Nasdaq Composite ($COMPX). (+)
  • Risk Gauges reversed course and are now back to full Risk-On. (+)
  • The 1-month vs. 3-month Volatility Ratio (VIX/VXV) has moved into full risk-on mode. (+)
  • As we anticipated last week, there has been a flush in Cash Volatility ($VIX.X) which is now in a bearish phase after breaking back below its 50-day moving average, a strong sign for equities. (+)
  • The number of stocks that are above their 200-day moving averages within the S&P500 and Russell 2000 has improved significantly. (+)
  • All levels of the market ranging from small to large-cap stocks have recovered steadily this week with IWM, MDY, and DIA all regaining their 50-day moving averages. (+)
  • Growth stocks (VUG) are now outperforming Value (VTV) on both a short and long-term basis. (+)
  • There was a nice recovery amongst the members of Mish’s Modern Family, but the most notable appears to be Regional Banks (KRE) reclaiming its 50-day moving average once again and now sitting in a recovery phase while the Triple Play indicator shows that KRE could even begin to outperform the S&P 500 on a relative basis. (+)


  • Interest rates rose this week, reversing a mean reversion trade as there seems to be continued pressure across the yield curve. (-)


  • Oil Services (OIH), Metal Mining (XME), and other Metals were all strong this week, making us feel a bit more confident about a possible commodities super cycle unfolding. (=)
  • Both Gold (GLD) and Oil (USO) broke out this week with GLD reclaiming a bullish phase and USO going parabolic with a big breakout to new 2023 highs. (=)

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