September Private Client Letter
/Volatility Makes a Comeback
U.S. equity markets have experienced a noticeable uptick in price volatility as the summer of 2024 winds down. The shift began in early July when several of the large tech companies sold off sharply. These same stocks that had led the equity rally this year managed to recover a large portion of those summer losses.
Then, on the first day of trading in September, equities again turned sharply lower with the tech heavy NASDAQ falling 3.25%. The S&P 500 also lost over 2% and the Dow Jones Industrial Average dropped about 1.5%.
Even after posting earnings results that beat Wall Street expectations with revenue growth surging an astonishing 122%, the stock of NVIDIA has been selling off. In the last six trading sessions alone, NVIDIA has lost about 18% of its market value and now trades 40% below its 2024 high.
Many market participants believe that the recent increase in volatility signals rising concerns about the health of the U.S. economy. The Fed is now widely expected to begin cutting interest rates in September and some forecasts show that these cuts could total a full point by the end of the year.
While some see lower rates as a positive development for equity prices, others regard an aggressive cutting cycle as an indication the economy that may be slowing faster than would be desirable. Accordingly, NVIDIA and other high-profile stocks are seeing big pullbacks in their valuations.
For most of the year, we have expressed concerns regarding an overvalued and overly concentrated market rally. According to BCA Research, the S&P 500’s current valuation stands at the third percentile of historic distribution. In other words, stock prices have become relatively expensive over the course of the 2024 rally.
Economic Data Remains Mixe
Regular readers of our Private Client Letter are familiar with our concerns over deteriorating economic data in recent months and the possibility our economy could slip into recession. The weaker-than-expected data also increased our apprehensions that the Federal Reserve has left interest rates too high for too long.
U.S. manufacturing activity fell short of expectations in August and the ISM Manufacturing index remains in contraction territory at 47.2. The manufacturing sector has now contracted for twenty-one out of the last twenty-two months (First Trust). Companies are also reporting dwindling backlogs as the new orders index dropped to its lowest level since May 2023. The weakness in the ISM Manufacturing index underpins a growing list of economic data pointing to a slowdown in growth.
U.S. ISM Manufacturing PMI
While the labor markets have demonstrated resiliency as other indicators falter, it is worth noting that over the last 12 months, more than 80% of net new jobs have been in government, healthcare, and education. Private sector job growth has been weaker than many realize and the government recently revised earlier job growth data by over 800,000 jobs. This revision means earlier reports had overstated job growth by about 28 percent per month, especially in industries like hospitality and professional services.
We have long noted that employment is a lagging indicator relative to the health of the economy. This week the Labor Department will release the August employment report, and we will be watching these numbers carefully.
Conclusion
Much of this year’s equity market gains have been driven by momentum on narrow leadership, as opposed to broadening earnings growth and expanding market participation beyond the tech sector. The problem with momentum driven markets comes when momentum turns. It is too early to say that such a shift is currently happening, however it is worth noting that a momentum shift often triggers widespread profit-taking (and lower stock prices overall). This is particularly common if the rally was overextended, or if economic activity is increasingly believed to be stalling out.
Stock market breadth has improved recently with an ongoing rotation away from the mega-cap growth stocks and we see this as a positive development. However, economic uncertainty and equity market volatility have both been trending higher. While equity and credit markets are reasonably well supported by the anticipation of lower rates and continued (if increasingly modest) earnings growth, these positives are not particularly robust and certain risks appear to be building. Accordingly, we continue to believe caution is warranted in the current environment.
As always, thank you for your continued confidence in our abilities to help you navigate the many challenges associated with growing and protecting your wealth.
John E. Chapman
Chief Executive Officer
Chief Investment Strategist
20240904 – 2
Disclosures:
THIS COMMENTARY HAS BEEN PREPARED BY CLEARWATER CAPITAL PARTNERS. THE OPINIONS VOICED IN THIS MATERIAL ARE FOR GENERAL INFORMATION ONLY AND ARE NOT INTENDED TO PROVIDE OR BE CONSTRUED AS PROVIDING LEGAL, ACCOUNTING, OR SPECIFIC INVESTMENT ADVICE OR RECOMMENDATIONS FOR ANY INDIVIDUAL. ALL ECONOMIC DATA IS DERIVED FROM PUBLIC SOURCES BELIEVED TO BE RELIABLE. TO DETERMINE WHICH INVESTMENTS MAY BE APPROPRIATE FOR YOU, PLEASE CONSULT WITH US PRIOR TO INVESTING. INVESTING INVOLVES RISK WHICH MAY INCLUDE LOSS OF PRINCIPAL. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities, insurance products, or to adopt any investment strategy. The opinions expressed are as of the date of writing and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Clearwater Capital Partners to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. S&P 500 is a registered trademark of Standard & Poor’s Financial Services, a division of S&P Global (“S&P”) DOW JONES, DJ, DJIA and DOW JONES INDUSTRIAL AVERAGE are registered trademarks of Dow Jones Trademark Holdings (“Dow Jones”). The two main risks related to fixed-income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.
