VIDEO: How We're Navigating This Week’s Wave of Economic Data

As we kick off the last month of the September quarter, Chris Versace discusses why this week’s barrage of August economic data could lead the market to rethink the pace of rate cuts coming this year. 

With the market’s P/E valuation still stretched and the market mostly overbought, we’ll remain on this path near-term. 

Transcript

CHRIS VERSACE: Hey, everyone. Chris Versace here. Tuesday, September 3rd. And I have to say that a weekend Wall Street Journal article summed it up pretty well, where it said, "Wall Street's summer vacation is over." If we think about this, in the US, the Labor Day holiday weekend, which I hope you enjoyed, has come and gone. Cooler temps are being ushered in. And for those of us who follow the market, it is simply time to get back to work.

You may have enjoyed your vacation in August. A lot of things happened, as we know. But it is time to get back to work. So let's set the scenario. After an August that started off pretty rocky, the S&P 500 gained about 1.6%, bringing its cumulative return over the first two months of the current quarter to about 3.4%.

But, as we noted in Friday's roundup, we are more than simply holding our own, even though the S&P 500's valuation is a little stretched and the market remains mostly overbought, as we kick into September a month, that has a reputation for being very challenging for the market, we are going to continue to walk a prudent or a cautious path.

Now, why is summer such a challenging month? There could be a variety of reasons. It could be summer vacation is over. It could be that we have this wave of investor conferences like we do every September, where companies kind of reassess what's happened in July, August, and into September, and they update their outlook not only for the September quarter, but they really sharpen their view on what is expected for the balance of the year. It could be some of that.

It could be that we're continuing to be in the doldrums, if you will, the hangers on of the current earning season. And yes, we have both of those happening this week. But in addition to that, we also have the usual start of the month data. So for August, what are we going to get? Manufacturing services and PMIs, the ADP Employment Report, the Challenger Job Cuts Report, and of course, the Employment Report.

And given what we know about the Fed and their recent comments, they're really focusing on two things-- continued progress on inflation, so some of that data that we'll get this week will point to that; but also, the jobs market. And what the Fed wants to see is continued healthy jobs. What the market is concerned about is a sharp falloff in the number of jobs being created and what the potential repercussions of that may be. That's the August data.

But we also have some data for July, including the JOLTS Report. And as it relates to several of our positions in the portfolio, most notably United Rentals and Vulcan Materials, but indirectly Waste Management. We also have the July Construction Spending Report. And we'll be tearing into that, looking to see what it says. Yes, on the residential side, Builders FirstSource, but really for what it tells us about non-residential construction.

All of this data that we're going to get this week is going to help to do, really, two things. First, sharpen expectations for GDP as it relates to the current quarter, but also sharpen expectations for what the Fed is likely to say and telegraph when it completes its next monetary policy meeting on September 18th. And as we look at the calendar, the time between today and that meeting-- not very long at all.

Let's remember, too, at that meeting, the Fed is also going to share its updated economic projections. That, of course, is going to be very important. And the reason I say that is this. Even though the CME FedWatch tool, which is reflecting the market's expectation for Fed rate cuts, even though the CME FedWatch tool shows a 25 basis point rate cut between-- sorry, for the month of September, it continues to show about 100 basis points between the September meeting and the end of the year.

We've talked about it. So that breaks down 100 basis points across three meetings. If the expectation is for at least today 25 basis points in September, it says at some point the market's looking for a 50 basis point cut and another 25 basis point cut. I think the data that we get this week is going to really shape the Fed's commentary, their tone, and those economic projections.

And I wouldn't be surprised, because when we look at the array of data that we have thus far, including the Atlanta fed GDPNow rolling GDP forecast, that's a 22.5% for the current quarter, hardly indication of an economy that is flailing or needs to be thrown a buoy or a life preserver. So if this week's data kind of shows that, yes, maybe it's a little slower, maybe it's a 2% GDP print, something like that, that keeps us within this no landing, soft landing scenario.

And in that backdrop, it's really hard to see the Fed delivering a 100 basis points between now and the end of the year. But, as we always say, we are active investors. That doesn't mean we're traders, but we're active investors. That means that as we get more data, and we're going to get a snootful of it this week, we are going to have to revisit our expectations. And if we need to change them, of course, we'll be thinking about what the implications are for the market and of course for the portfolio.

And that means that we will be sharing all of that with you. So I will say this. Thank you for watching today's video. But, as you can see, we're only starting out the week, which is, of course, going to be a little compressed, only four trading days this week and a lot of information coming.

So please, I would ask you, be sure to check your emails, check your alerts. We want to make sure you're getting our latest thinking. And if we make any moves with the portfolio, we want to make sure that you are right there with us. Thanks for watching.