The Worst Start to September in a Long Time

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Samantha Subin of CNBC reports S&P 500 tumbles Friday to post worst week since 2023, Nasdaq drops 2% for worst weekly performance since 2022:

The S&P 500 dropped Friday, notching its worst week since March 2023, as investors assessed the fallout from a weak August jobs report and ditched leading technology stocks.

The broad index slid 1.73% to settle at 5,408.42, while the Nasdaq Composite shed 2.55% to close at 16,690.83. The tech-heavy index ended the session more than 10% off its record close. The Dow Jones Industrial Average fell 410.34 points, or 1.01%, to end at 40,345.41.

“It’s a sentiment-driven move that’s largely driven by growth concerns,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management. “The market’s oscillating between this idea of is bad news bad news, or is bad news good news, and the sense that it may revive hopes that the Fed moves more aggressively than markets anticipate.”

Megacap tech stocks tumbled as investors dumped risk assets amid mounting worries about the health of the U.S. economy.

Amazon slid 3.7% and Alphabet slumped 4%. Meanwhile, Meta Platforms lost more than 3%. Broadcom shed 10% on lackluster current-quarter guidance. Other semiconductor names fell in sympathy, with Nvidia and Advanced Micro Devices dropping about 4% each. The VanEck Semiconductor ETF (SMH) declined 4% and posted its worst week since March 2020.

Friday’s moves closed out a rocky week for equity markets. The S&P 500 registered a 4.3% decline and its worst week since March 2023. The Nasdaq shed 5.8% for its worst week since 2022, while the 30-stock Dow has slumped 2.9%.

Fresh August jobs data added fuel to concerns of a slowing labor market. A bout of weak data has sparked worries about the health of the economy, spooking markets and denting risk appetite in recent weeks. Nonfarm payrolls grew by 142,000, versus a 161,000 gain expected by economists polled by Dow Jones. However, the unemployment rate edged down to 4.2%, in line with expectations.

“The market in general is looking for direction, and that’s going to come from the Federal Reserve,” said Charles Ashley, portfolio manager at Catalyst Capital Advisors.

Investors widely expect the Fed to cut rates by at least a quarter-percentage point at the conclusion of its policy meeting later this month, but softening labor market trends have boosted bets that the central bank could go bigger. Traders are split on whether the Fed will cut by a quarter- or half-percentage point, according to CME Group FedWatch Tool.

Josh Schafer of Yahoo Finance also reports the US unemployment rate falls to 4.2%, labor market adds 142,000 jobs:

The US economy added fewer jobs than expected in August while the unemployment rate ticked lower.

Data from the Bureau of Labor Statistics released Friday showed the labor market added 142,000 nonfarm payroll jobs in August, fewer additions than the 165,000 expected by economists.

Meanwhile, the unemployment rate fell to 4.2% from 4.3% in July. August job additions came in higher than the revised 89,000 added in July. Overall, revisions to the June and July labor reports showed the US economy added 86,000 fewer jobs than initially reported in those months.

Wage growth, an important measure for gauging inflation pressures, rose to 3.8% year over year, up from a 3.6% annual gain in July. On a monthly basis, wages increased 0.4%, higher than the 0.2% seen the month prior.

Capital Economics chief North America economist Paul Ashworth wrote in a note to clients that the August jobs report is "still consistent with an economy experiencing a soft landing rather than plummeting into recession."

Friday's report comes amid an ongoing debate over how severely the Fed should cut interest rates at its meeting later this month. During a late August speech, Federal Reserve Chair Jerome Powell said the cooling in the labor market has been "unmistakeable" and added that the central bank does not "seek or welcome further cooling in labor market conditions."

Data released earlier this week indicated further signs of slowing in the job market. ADP's National Employment Report for August showed private payrolls in the US added 99,000 jobs during the month, well below economists' estimates for 145,000 and fewer than the 122,000 jobs added in July. The August data marked the fifth straight month payroll additions had slowed from the month prior. Meanwhile, data out Wednesday showed July ended with the lowest amount of job openings in the US labor market since January 2021.

Still, some economists argue that signs of strength within Friday's jobs report are enough to prompt the Fed to cut interest rates by 25 basis points at its upcoming September meeting rather than making a larger 50 basis point cut.

“The overall solid gain in August payrolls, the retreat in the unemployment rate, and pop in average hourly earnings are not likely enough for Fed officials to start the rate cutting cycle with 50bps reduction on September 18,” Nationwide chief economist Kathy Bostjancic wrote in a note to clients on Friday.

But Bostjancic added that the downward revisions to payroll additions in prior months, as well as current job gains coming from a narrow group of sectors, "underscore that the labor market is losing steam rather quickly." This, Bostjancic argues, could open the door for the Fed to cut rates by 50 basis points at one of its meetings this year.

The market agrees, with traders pricing in more than 100 basis points of cuts from the Fed this year, per Bloomberg data. As of Friday morning, markets were pricing in a 45% chance the Fed cuts rates by 50 basis points by the end of its September meeting, up from a 30% chance seen a week prior per the CME FedWatch Tool.

It's Friday, let me begin with my macro forecast and what it means for markets going forward.

First, no question in my mind, the global recession is just getting underway.

I don't care if Capital Economics thinks today's US jobs data consistent with a soft landing, I'm telling you, a very hard landing is just commencing and it will impact the entire world.

Some countries, like Canada, will really feel the brunt of this global recession.

In fact, today we learned Canada's unemployment rate increased to 6.6% in August from 6.4% in July as students continued to face a difficult summer hiring season.

Statistics Canada's labour force survey showed the economy added a modest 22,000 jobs last month, lagging the pace of population growth.

Just wait, when all is said and done, I strongly suspect this recession in Canada will feel a lot more like 1982 but the Liberals will continue spending away until the next election.

As far as the US, the macro backdrop is clearly deteriorating and it's not just employment data pointing to this.

Earlier this week, the US Manufacturing PMI® registered 47.2 % in August, up 0.4 percentage point from the 46.8% recorded in July but it's still in contracting.

More worrisome, the New Orders Index remained in contraction territory, registering 44.6%, 2.8 percentage points lower than the 47.4% recorded in July and that suggests earnings are about to get clobbered at US companies.

All this suggests to me the impact of Fed tightening is just getting underway and it will last a while before it's done.

Earlier this week, I listened to Francois Trahan's latest conference call at Trahan Macro Research. Titled "The Key Market Theme This Fall...Volatility!"

it was a truly superb call where Francois went over 65 pages of slides illustrating why the US macro backdrop is deteriorating quickly, why market volatility is heading up as the economy slows, why market leadership is already shifting and why it this Fed easing campaign will last a while.

I'll share just a few of his slides here:

As far as today's US jobs report, Francois tweeted this earlier today:

Now, I don't care where you work -- an elite hedge fund or private equity fund or a global pension fund or sovereign wealth fund or a fortune 500 corporation or large investment bank -- if you're not privy to research from Trahan Macro Research, you're not prepared for what lies ahead.

Very few people cover macro and markets as well as Francois and even when I disagree with him, I agree with him on the bigger picture, it's dismal.

The other person who produces excellent research is Martin Roberge of Canaccord Genuity. 

In his latest weekly wrap-up, Pricing in Recession Risk, he notes this:

Our focus is this week is on the US labour market with the August nonfarm payrolls clocking in at 142k, missing consensus (160k). Notably, three developments caught our attention. First, revisions for June (-88k total) and July (-25k) confirm our view that initial BLS estimates shouldn’t be taken at face value at economic inflection points. What would have been the market reaction on a 118k number in June vs. the 206k initially reported? As we show in the first panel of our Chart of the Week, total revisions by the BLS over the past year amount to 447k or 37k per month. Using this metric, the 142k headline number this morning could end up being ~105k in two months from now. Second, labour market cracks are becoming increasingly apparent with the hiring rate now standing much below pre-pandemic and pre-GFC levels while the unemployed / job openings ratio rose to 0.9x, from 0.5x in early 2022 (second panel). Also, one should keep in mind that hires and separations (layoffs, quits, etc.) are a natural monthly occurrence. While layoffs do increase through economic downturns, unintuitively, the separation rate declines as quits plummet. Thus, in our view, what really drives unemployment higher is the fact that job seekers cannot find new positions as hires plunge, similar to what we are seeing now. Last, we note that non-cyclical employment from government and private H/C + education services accounted for 50% of the 142k nonfarm release this morning. As such, while the economy is adding a decent number of jobs at face value, we think the details of recent nonfarm payrolls reports raise odds of a recession.

Martin also had a conference call this week, I have yet to listen to it so I cannot share much here but one bonus chart in his chart pack caught my attention:


From my vantage point, what is important to note is the US economy is slowing fast, the Canadian economy is already in a recession and the Bank of Canada did cut rates by 25 bps again earlier this week but it's not enough, they need to cut massively to avert a depression up here.

What does all this mean for stocks, bonds and the USD?

In his charts, Martin Roberge thinks US 10-year bond yield will have a hard time going lower than 3.5% without a significant drop in inflation and he thinks the US dollar weakness will persist.

I agree that the 10-year US Treasury bond yield will have a floor of 3-3.5% unless something cracks in the credit market sending it a lot lower but I don't agree with his US dollar call because when a global recession strikes and a financial crisis hits, everyone seeks refuge in the greenback.

Below, you'll see the graphs showing 5-year weekly chart of the US long-term Treasury bond prices (TLT) and the US dollar index (UUP):

Both remain  bullish but I'm more bullish on the US dollar than US long bonds here and see the recent weakness in the greenback as a buying opportunity.

As far as stocks, all eyes on the Nasdaq and semiconductor stocks that suffered their worst week since 2020:


Believe it or not, despite the terrible week, these charts remain bullish and unless I see more sustained selling in the coming weeks, it's hard to be bearish right now.

In particular, two stocks that got dinged hard this week -- Nvidia and Broadcom -- could bounce big next week:

If these two stocks don't bounce big next week and continue selling off, then they're heading a lot lower and semis are in real trouble.

That's the LTK Capital Management (Leo Thomas Kolivakis) house view and I don't care if you agree or disagree with me, I'm giving you my best trading advice here.

You see, while I remain bearish on the macro front, I'm also cognizant that stocks don't go up and down in a straight line and there will be plenty of countertrend rallies before this bear market is all over.

And there are also excellent special situations to trade like Iovance Biotherapeutics (IOVA), my top biotech holding which I added to this morning after the US jobs report (was a steal below $10; big pharma will eventually buy it out at $30++):

Alright, let me wrap it up there and remind all of you, Pension Pulse isn't a charity, you're getting top of the line coverage on pensions and markets so make sure you hit that PayPal button on the top left-hand side under my picture and contribute generously.

And yes, I have better things to do on a Friday night than blog, like go watch tennis which I'm about to do.

Below, Tom Lee, Fundstrat Global Advisors managing partner, joins CNBC's 'Closing Bell' to discuss market outlooks, expectations for the Fed, and more.

Dan Greenhaus, Solus Alternative Asset Management chief strategist and economist, and Courtney Garcia, Payne Capital Management senior wealth advisor, join CNBC's 'Closing Bell' to discuss market outlooks, reactions to new labor data, and more.

Third, Stephanie Link, Hightower chief investment strategist, and Mike Bailey, FBB Capital Partners director of research, join CNBC's 'Power Lunch' to discuss whether the market sell off is surprising, outlooks on today's jobs report, and more.

Fourth, KPMG's Diane Swonk, Interactive Brokers' Steve Sosnick, and CNBC's Steve Liesman join 'The Exchange' to discuss the latest economic data.

Lastly, Julia Pollak, chief economist at ZipRecruiter, joins CNBC's 'Power Lunch' to discuss the latest jobs report, whether a positive tone in the labor market is real, and more. Listen carefully to her analysis, she's spot on.

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