Investors Navigate Recession Fears After Difficult Quarter for The S&P

October 10, 2023

From the desk of Vance Howard:

23-10-9-SPY

_{Chart: SPY 1-year daily}

Even with the recent selloff the HCM-BuyLine^® remains positive, but it has weakened, and we are monitoring it closely. This is truly a tale of two markets. If you have not been heavily invested in what has become known as the magnificent 7, meaning the 5 FANG stocks plus Nvidia and Tesla, you have made no money this year. RSP, the ETF of the equal-weighted S&P 500 is down -.84% YTD.

_{Chart: RSP 1-year daily}

The U.S. economy appears to be on a path towards a soft landing, but we can’t underestimate the risk of a recession as near-term concerns rise. While Q2 real U.S. GDP showed a 2.1% annual growth rate, economic growth is likely to slow in Q4 and in 2024 (due to student loan repayments, strikes, etc.), labor markets should cool and get back into balance, and impacts from credit tightening should be increasingly felt.

The third quarter brought a market pullback for stocks, with the S&P 500’s first negative quarter since Q3 2022. Shifting sentiment from recession concerns to uncertainty about economic growth and inflation influenced market performance. Historically, a Q4 rally often follows a down Q3, and we remain constructive of stocks moving higher in Q4.

The equity put-call ratio spiked to 1.97 intraday. This is a huge reading, reflecting investors disproportionately buying puts–meaning investors are bearish. But as we know, when market participants make an extreme move in one direction, the forward path tends to be the opposite.

In the past 30 years, or 7,650 trading sessions, an intraday spike of 1.97 has only been seen 20 times, or 0.20% of all trading sessions. That is an extreme reading and shows how much fear has been created in the past week.

The recent employment report was truly stunning. Payrolls expanded by a whopping 336,000 in September, well above the highest estimate in the Bloomberg survey, double the consensus of 170,000, and above our estimate of 140,000. Additionally, the prior two months were revised up by a total of 119,000, the most since December 2021. Despite all the job creation, average hourly earnings increased just 0.2%, bringing the y/y change down to 4.2% from 4.3%, which was in line with expectations. This may be explained by an ongoing mix shift. Although job gains were broad-based, they were concentrated in lower paying industries. The unemployment rate remained at 3.8%, above expectations of 3.7% but in line with the forecast.

Vance Howard

_{This communication is issued by Howard Capital Management, Inc. It is for informational purposes and is not an official confirmation of terms. It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to. Opinions expressed are subject to change without notice. Howard Capital Management, Inc. may maintain long or short positions in the financial instruments referred to and may transact in them as principal or agent. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, Howard Capital Management, Inc. does not accept any liability arising from the use of this communication. Howard Capital Management is an SEC-registered investment advisor which only does business where it is properly registered or is otherwise exempt from registration. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability. Past performance is no guarantee of future results.HCM-022223-WW05 (02/2023)}