The Growth Scare is Here
The growth scare that we and others have been worried about finally appeared last week courtesy of the soft ISM Manufacturing PMI and jobs report and the result was a sharp drop in the S&P 500 and a collapse in Treasury yields (to nearly six-months lows). Additionally, on Friday I heard countless mentions across the financial media of recession risks and possibilities.
However, it’s important to push back on the emotional anxiety that naturally occurs when stocks drop and the financial media screams trouble. But here is the reality from last week’s data. First, for anyone paying attention (as we all have been) last week’s data was not a surprise. There have been signs of a loss of economic momentum in various data points for months via economic reports and corporate commentary.
Second, last week’s data really wasn’t that bad in aggregate. Yes, the ISM Manufacturing PMI was ugly but it’s been weak for months and wasn’t that much worse than before. Jobless claims and the jobs report, meanwhile, were worse than expected but on an absolute basis, 249k jobless claims is still very low and while July only added 114k jobs, the three- and six-month averages are still very healthy in the high-100k range.
Third, and most importantly, last week’s declines are more about the complacency we and others have warned about, not about a sudden, serious deterioration in the data. Two weeks ago, the S&P 500 was trading near 5,600 on a 2024 EPS of $245ish and 2025 EPS of $270ish. That’s a 22.8X multiple and a 20.8X multiple, respectively. Those are multiples for perfect environments, i.e. solid (and not slowing growth), explosive earnings growth, no existential risks (geopolitics, etc.). That’s not the environment the market has been in for months, and last week the data was bad enough to make the market finally admit it and that’s why stocks dropped hard, not because the actual fundamentals turned materially worse (they just weren’t as good as hoped for and investors finally had to admit it Friday).
Here’s why I can confidently say this: If the data was as worrisome as the market implied on Friday, nothing would have been up last week. But plenty in the market was: USMV (up 0.31%), SPLV (up 1.04%), XLU (up 3.47%), XLP (up 0.56%) XLV (up 0.15%) all were positive. If the data was screaming recession, those sectors would not be positive, they’d just be down a lot less than everything else. Additionally, all of those sectors are positive since July 16 (the peak in the S&P 500).
Looking forward, is a recession that hits stocks hard possible? Absolutely. And that’s a risk we are continuing to watch closely. But suddenly saying a recession is a real risk is about as appropriate as previously thinking one wasn’t possible at all. Bottomline, the growth scare is here. I continue to hold 25% in value stocks so as to buffer some of this downturn.
But last week’s data just told us unequivocally that growth is slowing, and the market finally had to listen. That does not mean a contraction or recession is imminent ,and as such, we do not think de-risking via raising cash is appropriate unless you are sure you can get back in appropriately, because the outlook for this market hasn’t significantly changed as much as the price action implies.I believe the markets need a Fed interest rate downturn and that is right around the corner. As with last year, August and September are tough months for the market, but not a reason to get out. We will continue to watch the trends carefully, so as to move if things get worse.
Speaking of the economy, anyone in the commercial or residential real estate market can share with you how bad that market is. I have a client who is part owner of a cement company that has been around for decades, and he said it is the worst that he has seen. His company PorMorhas done numerous projects for me and has done a stellar job. They are now struggling and need additional business to survive this crisis in the real estate markets. I know that if you need cement work, you can get great deals. Call Mark Kiemig at 303 944 4187 and tell him I told you to call. They are clearly the best cement company in the city.
"This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results. Investors should always consult their financial advisor before acting on any information contained in this newsletter. The information provided is for illustrative purposes only. The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."