Market Chop Before The Drop…

Watch Out for the Land Mines!

If there’s one word that would sum up today’s financial market conditions, it would be indecisive. Large-cap stocks have been chopping around – one day up, the next day coughing up the gains – as traders weigh a slew of problems and prophesies.

For instance, stocks rose after inflation came in slightly higher than expected. Economists anticipated August having an annualized CPI growth of 3.6%, but the actual result came in at 3.7%. Short-term traders apparently looked at the slightly unfavorable result and said “that’s not ideal, but it’s good enough,” meaning that the Federal Reserve probably won’t jack up interest rates too much based on a slightly hotter than expected CPI print.

Granted, the Fed might be inclined to raise interest rates at the next FOMC meeting, so the market isn’t out of the woods by any means. This might explain why large-cap stocks were in the red today since stock traders are starting to come to terms with a potentially negative surprise later this month. September is seasonally the worst month for stock market returns, and October was particularly severe in 1929, 2008, and 2022.

The specter of a negative surprise is quite real. Reportedly, 97% of bets are currently on the FOMC holding interest rates at current levels. That’s optimism to the point of complacency, and true contrarians should be concerned about complacency leading to shock and awe.

Meanwhile, with a handful of so-called “Magnificent Seven” tech giants single-handedly propping the S&P 500 up (since it’s an index that’s weighted by market cap), it’s particularly disappointing to the perma-bulls that Apple’s recent unveiling of its iPhone 15 lineup was basically a bust. As Needham analyst Laura Martin put it, “The product launch was very sleep-able… Nothing’s new, nothing’s exciting.”

Then there’s oil. The August CPI print doesn’t reflect what’s happening now with the U.S. oil price, which just crossed above $91 per barrel for the first time since November 2022. Believe it or not, oil prices are now up by around 40% from their lows this summer.

With oil futures up for three consecutive weeks, large-cap stock investors really ought to be more vigilant than complacent. Edward Moya, senior market analyst at OANDA, warned that “The oil market is going to stay tight a while longer” and added that “$100 is not that far away.”

This is problematic because expensive oil means it costs more to ship all kinds of products to businesses and homes. When the petroleum price rises, prepare for practically everything to go up with it.

Related to gas prices are car and truck prices, and it’s troubling to consider that all of these are likely to cost more in the near future. Workers with the United Auto Workers (UAW) union are now on strike at Detroit-based vehicle production plants for Ford, General Motors, and Stellantis.

Naturally, a shortage of available auto workers will lead to a shortage of available vehicles. Unless there’s a sudden drop in demand, a reduced supply means that new vehicles from the “Big Three” Detroit automakers will have higher price tags.

Finally, in case anybody’s still keeping track anymore, The 10-year minus 2-year Treasury yield curve has been inverted for 313 trading days. This is the second-longest inversion in history after the yield curve inversion of 1980.

Yield curve inversions don’t actually cause recessions, but they’re a consistent predictor of them. The signs are all there even without this, and if you’re still not convinced enough to diversify into tangible, inflation-resistant assets by now, you’d better hope for a miracle by the end of the year.