One of the critical goals of any investment strategy is to prevent significant drawdowns. Tracking the historical declines from previous market peaks can serve as a crucial gauge for determining whether a market has entered a bear phase. As of September 24, opinions on U.S. equities vary—particularly as the S&P 500 has only experienced a modest one-year decline of 3.3%. However, the data surrounding drawdowns reveals a more concerning picture for the U.S. stock market.
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● U.S. durable goods orders fell by 2% in August—the first decline in three months. | MarketWatch
● Jobless claims in the U.S. rose by 3,000 last week, totaling a still-low 367,000. | Bloomberg
● According to the Chicago Fed Index, U.S. growth was at a slightly above-trend pace in August. | Chicago Fed
● New home sales in the U.S. increased by 5.7% in August, reaching a post-recession high. | WSJ
● The U.S. Consumer Comfort Index saw its highest increase in three months. | Bloomberg
● The Kansas City Fed Manufacturing Index reported a slower rate of decline in August. | 24/7 Wall St
● Eurozone lending increased, while the M3 money supply growth rate decreased in August. | Reuters
The market is currently fraught with turbulence, raising concerns regarding global economic growth, including that of the U.S. Does this imply that the Federal Reserve will refrain from raising interest rates this year? Not necessarily, as suggested by Fed Chair Janet Yellen in a recent speech. A slowdown in China’s growth and mixed economic reports from the U.S. have led many economists to argue against tightening monetary policy at this time. Yet, Yellen seems to hold a different perspective. Her decision to pause on rate hikes at last week’s FOMC meeting, which was interpreted as a sign of caution regarding the future, should not be conflated with her current stance.
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According to the latest update of the Chicago Fed National Activity Index’s three-month average (CFNAI-MA3), U.S. economic activity in August grew at a pace slightly above the historical trend. The August figure of +0.01 slipped from July’s revised +0.02, but both readings indicate a positive macroeconomic trend.
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Arguing for optimism is becoming increasingly challenging. While the overall U.S. macro trend remains positive, the market seems to have lost its momentum. An econometric analysis suggests that a bear market may have recently begun. While this could be a false alert, it’s evident that market risks are on the rise. The underlying reason for maintaining a cautious outlook is that U.S. economic growth does continue positively. Although signs of stress are appearing, favorable conditions still persist. It is important to remember that economic data often has a delayed impact. So, does the market possess insights not yet captured by existing macro data? Perhaps, though history shows that the market is not infallible when it comes to predicting economic cycles.
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● The U.S. Manufacturing PMI remained unchanged at 53.0 in September, indicating the slowest growth in 22 months. | Markit
● U.S. mortgage applications surged by 13.9% in the week ending September 19. | CNBC
● The Volkswagen scandal presents risks for the German economy. | Reuters
● Japan’s Manufacturing PMI dipped slightly, remaining close to neutral at 50.9. | Markit
● German business confidence (Ifo) improved in September. | RTT
● Consumer confidence (GfK) in Germany has eased. | Reuters
The three-month average of the Chicago Fed National Activity Index (CFNAI) is anticipated to show a modest increase in the upcoming August update, scheduled for tomorrow (September 24). This forecast, derived from The Capital Spectator’s average point estimates across several econometric models, suggests a reading of +0.08, which exceeds July’s zero reading—indicating growth that aligns with historical trends. Only negative values below -0.70 raise an “increasing likelihood” that a recession has commenced, as per guidelines from the Chicago Fed. The August estimate indicates economic expansion slightly above historical trends, well above the threshold marking the potential onset of a recession.
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U.S. manufacturing activity appears surprisingly robust in September, based on the initial estimate of Markit’s purchasing managers’ index (PMI). This assessment is somewhat unexpected, given the previously reported weakness in three regional manufacturing indexes from various Fed banks, as discussed yesterday. However, on a national level, the manufacturing sector shows relative resilience. Growth remains moderate, teetering on sluggishness for manufacturers. Nevertheless, today’s PMI update does not signal a troubling downturn for the U.S. business cycle.
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Earlier this year, I evaluated ten asset allocation mutual funds, analyzing their strategic designs as part of an academic exploration of multi-asset strategies in real-world scenarios. While the outcomes varied, with some funds showing considerable gains by late February, the market volatility and price drops recently have resulted in significant losses for these funds.
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● China’s Manufacturing PMI fell at a slightly faster rate in September. | Markit
● Eurozone Composite PMI growth decreased in September to 53.9. | Markit
● Germany’s Composite PMI growth slipped to 54.3 in September. | Markit
● The Richmond Fed Factory Gauge reached a 32-month low. | IBD
● The Redbook index indicates a slowdown in U.S. retail sales during September. | Dow Jones
● Consumer confidence in the Eurozone eased to -7.1 in September. | Reuters
