Economic Slowdown doing Economic Slowdown Things

Table of Contents

• Getting caught up.

• Breadth Thrust arrived.

• Biden dropped out, then came the volatility.

• Defensive names are leading Year-to-Date.

• Yield Curves un-inverting?? Yes! and No!

• Labor Market looks as though it has begun to deter …

• Crypto struggling.

• Oil and Copper prices rolling over.

• Here come the rate cuts.

• Markets probably aren’t finished going down or goi …

• Slowdown doing Slowdown things.

• What Happens Next

Getting caught up.

Holy hell, a lot has happened since my last post on the state of the markets and economy. I wrote right before a three week trip around the country hiking, seeing family and friends, meeting new friends, getting re-centered, assessing, and planning future growth.

Typically, Summer is a great time to do so as markets are a bit slower. Not this year though.

Let’s get caught up so you’re ready for what is shaping up to be a very interesting few months.

Breadth Thrust arrived.

Exactly one week after posting Accumulation of Red Flags in the Economy, we saw the market breadth thrust we needed. Interestingly, this happened right before the market peaked and began rolling over into the volatility event of Aug 5th.

What’s important to note is that market breadth—meaning how many stocks are participating in the rally—reached its previous highs as the market climbed. This tells us that the market's strength wasn’t limited to just a few big stocks but spread across multiple sectors. In other words, a broader range of stocks contributed to the rally.

This is significant because it suggests the market as a whole is strong. It’s not the kind of scenario you’d expect before a market crash.

Biden dropped out, then came the volatility.

As I have been pointing out since the 2024 Forecast posted in the beginning of the year, Biden dropping out of the race introduced uncertainty, which caused the markets to decline.

However, that wasn’t the only factor behind the increased volatility. Another key issue was the unwinding of the yen carry trade, which caused volatility to spike by nearly 200% between the close of trading on Friday, August 2nd, and the peak on Monday morning, August 5th.

Since then, the VIX (a measure of market volatility) has settled back down into the teens. While the extent of the back and forth move in the VIX may seem extreme, it is more indicative of how the index moves as markets begin to get less certain. What you want to know is that the quick and extreme move happened and did so right when you would expect it to do so as the economy slows.

Now you want to see if this turns into a more prolonged trend above 20.

This is significant as Economic Slowdowns are when you will typically see volatility begin to trend up. The fact that this is happening puts more weight into the opinion that we are now firmly on the backside of this current credit cycle and the economy, while still growing, has begun to do so slower than the Expansion.

Defensive names are leading Year-to-Date.

Another note of significance is that Utilities, Consumer Staples, and Healthcare make up 3 of the top 5 sectors for performance year-to-date. The reason this is significant is that those three sectors are what are considered “Defensive”. Meaning money flows to them when it is scared because of it’s perceived safety in weakening economies.

The other side of this is that money is flowing to Utilities because of the amount of power we need to generate for AI and data centers. Staples are up because of growing earnings and revenues, and everyone is chewing Zyn nicotine pouches. (The Zyn part is a joke, but it’s a good one if it’s something you’re familiar. Just trust me and LOL.) And Healthcare is up because of the aging Baby Boomer population.

All true. So this is just another piece of info at the moment in the Bearish camp, but not a reason to make a final decision on what happens next in the market and economy.

These could always unwind and take up leadership again at a later date, or they could lead for several more months. You just want to be aware that it is happening.

Yield Curves un-inverting?? Yes! and No!

The 10-Year and the 2-Year closed un-inverted for the first time since July 6th, 2022. This is significant because yield curves typically un-invert a few months before a recession begins.

However, the 10-Year and 2-Year is only one yield curve and not even the most important one. You want to be aware of it though as it typically leads the more important 10-Year and 3-Month yield curve, and that is not close to un-iverting at the moment nor is it trending higher yet.

There will come a time when both of these will move higher aggressively, which is referred to as a bull steepening. When that happens, we will more than likely be close to or entering a recession.

Now is the time to observe, but not freak out over this one.

Labor Market looks as though it has begun to deteriorate.

Not only are job openings now trending lower,

…but now we can safely say the unemployment rate has begun to trend higher as well. It could always trend down again, but I don’t think that will happen until the next cycle.

However, while it is now trending higher it is doing so at a snails pace. Eventually this will escalate and rise much faster for a bit, but that does not yet seem to be in the cards. Give it a few more months though, and it could be.

Crypto struggling.

While it still appears to be consolidating, Bitcoin has also been struggling to resume its trend higher. This is significant as crypto has been a great gauge of risk appetite for the past several years. Should crypto prices collapse here, then the stock markets will more than likely follow if they are not already falling themselves.

With that being said, this isn’t the worst look after a 370%+ move higher in 15 months. If this is a consolidation before a another leg higher, it is doing so right where it should and has been supported where it needs to be so the jury is still out on this one.

Oil and Copper prices rolling over.

Higher oil and copper demand are often indicators of future growth in the economy. While it can be said that oil prices are falling due to the protracted recession in China, copper is a different story as it is needed to help build and expand the infrastructure for the world’s increasing demand of electricity brought upon by AI and data centers.

If Oil and Copper do not hold these lower levels, it could spell trouble for the overall economy as the lower demand will signify far less transporting, building, and construction than is needed to prop up a slowing economy.

Here come the rate cuts.

The Fed is set to begin cutting interest rates next week, Wed, Sept 18th. Expect to see a .25% cut to begin. Currently it looks as though you will see a full point cut between now and the end of the year. So at this point expect to see:

-.25 September → -.5 November → -.25 December

or

-.25 September → -.25 November → -.5 December

How the economic data prints over the coming weeks will be the determining factor, and you will see it here.

Markets probably aren’t finished going down or going up…

Corrections, bear markets, and subsequent recoveries typically occur more often during Economic Slowdowns. We have already experienced one 10% correction during this Slowdown, and a couple more 10% corrections or a 20% correction is still likely to occur before the real crash happens to end the current credit cycle.

Unless of course the economy can stay out of a recession and extend this current cycle. At this point though, that is looking less likely. Then again, so is a severe and protracted recession.

Of course, this could all change but only time will tell. What you want to do is focus on the current path unless or until that changes. If it does, you will be one of the first to know about it through this newsletter.

Slowdown doing Slowdown things.

Economic Slowdowns are confusing. They constantly send conflicting signals. Especially if you’re looking too close and/or at the wrong data points and giving them greater significance than history suggests.

Those at the lower end of the wealth gap will continue to struggle and it will continue to get worse while consuming more people.

This is how the system works, Fed or no Fed. In fact, it was FAR worse and more erratic with higher inflation at times when the US did not have a Central Bank. Booms and busts are a human behavior thing and will continue with or without a Central Bank. So no use in getting angry or irritated. Instead, recognize that it happens and plan accordingly.

Yet, so far this has been a pretty standard slowdown and there’s no reason to think that will change at the moment. The economy will more than likely continue to get worse from here no matter who wins in November. More importantly, what happens over the next couple of years will not be the result of whoever is in the Oval Office, but rather a standard continuation of the credit cycle.

What Happens Next

At this point, the aggregate information suggests that we continue to ride the election seasonality wave. Now the question is, do we continue with the election year seasonal pattern while a sitting President, or in this case a former President, is running like the green line below as we have been?

Or, do we go the way of an average presidential election year like the blue, black, and gray lines below?

At this point, it looks like the first option.

The good news is that whatever happens in the next month or so will give us a lot more clarity into the end of the year and first few months of 2025.

Personally, I’m expecting some more volatility in the coming weeks as we continue hitting new highs into the end of the year.

It’s just an Economic Slowdown doing Economic Slowdown things.

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