What happened last week
- Price Action: Poor September seasonality may be to blame for a more than 4% decline in U.S. large caps.
- AI Woes: A delayed reaction to Nvidia (NVDA)’s “good but not good enough” earnings report potentially drove broad-based weakness in the AI theme last week.
- Jobs Data: The rate of job creation continued to slow; however, this was not a surprise to most of the market.
What we’re watching this week
- Inflation: Consumer and producer inflation are the last big economic data releases before the Fed meeting.
- Politics: Trump and Harris will face off tomorrow at 9 PM in their first, and potentially last, encounter on the debate stage.
- AI Theme: Apple expected to unveil new AI features and pricing for new hardware, including its new phone, Oracle, and Adobe reporting 2Q earnings.
Horizon’s Investment Management Views
September began on a sour note as equities sold off heavily in last week’s holiday-shortened trading action. The S&P 500 declined over 4%, its steepest four-day start to a month since… August. There was little fundamental information about last week’s price action from our seat. Investors pointed to poor seasonality for stocks and delayed reaction to NVDA’s earnings in the final week of August as the rationale for the selling. While September is historically the worst month for the S&P 500, neither point is very convincing to us. Still, with shorter-term momentum signals favoring the bears, we may need a strong fundamental catalyst, such as a Fed meeting, for new all-time highs.
The jobs report confirmed what market participants already knew – the labor market is slowing. But it is not slow; the unemployment rate fell, and the 3-month average job creation remains healthy at around 120 thousand per month. The all-important data release did not conclusively settle the 25/50 bps debate for the Fed. We lean toward a smaller size cut with promises to do more if needed, but either way, it is clear that Powell and the committee want to lower short-term rates to further support the soft landing. Rate markets are reflecting this dynamic as yield fell sharply last week through the lows seen last December. We are watching to see how interest-rate-sensitive parts of the economy, such as housing and auto sales, respond in the coming weeks.
It is inflation week in the U.S. – consumer and producer prices are the main economic data points. However, we still think jobs matter more than inflation at this part of the cycle. Across the Atlantic, the European Central Bank is set to cut rates by 25 bps on Thursday; we will be watching their forward guidance on how much more to expect. The first, and perhaps only, debate between Trump and Harris on Tuesday night may move expectations of what to expect in November. Apple’s unveiling of its new AI-powered iPhone today and earnings reports from Oracle and Adobe later in the week will be important barometers for where the AI theme goes from here.
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