Bearish. September is the worst DJIA, S&P 500, NASDAQ, Russell 1000 and Russell 2000 month. Average declines range from –0.4% from Russell 2000 to –0.7% by DJIA. In post-election years since 1950, September is still ranked no higher than #9 while average performance remains negative with only a modest improvement.
Decelerating. Although the second estimate of Q2 GDP was revised 0.1% higher to 6.6%, estimates for Q3 are slipping. According to the Atlanta Fed’s GDPNow Forecast, Q3 growth is projected to be 5.7% as of its update on August 25 from 6.1% the prior week. Corporate earnings growth is also slowing as easy year-over-year comparisons fade into history. Housing and labor markets are cooling as the pace of gains in both are also moderating. Broad moderation across the economy as it continues to struggle to return to “normal” is likely to have a similar effect on equity market returns going forward.
Stretched. DJIA, S&P 500 and NASDAQ have all recently broken out to new all-time highs. However, momentum appears to be waning. Weekly and cumulative advance/decline metrics are still mixed suggesting the move to marginally higher new highs has occurred with limited participation. Historically as participation fades so has the rally.
0 – 0.25%. Fiscal and monetary policy both remain highly supportive, but for how much longer is the key question. Discussions of when and how the Fed will taper bond purchases are accelerating and some clarity was given on Friday, August 27, when the annual Jackson Hole symposium took place virtually due to the Delta variant’s seemingly unchecked spread. Tapering could begin later this year in Q4 and the Fed is still not expected to begin raising rates until sometime in late 2022 or even early 2023.
Bulls retreating. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors have slipped to 50.0%, their lowest number since May 2020. Correction advisors have increased to 31.5% while Bearish advisors have crept up to 18.5%. The ongoing retreat in bullish sentiment combined with a modest uptick in correction/bearish is encouraging, but overall sentiment is still at levels that call for caution.