In Case You Missed It: Key Charts of the Week:

By Mark Masterson on September 27, 2024

It has been said “a picture is worth a thousand words.”

A few interesting charts to start the week……

Still watching the US dollar.

It’s crawling along the bottom of this channel.

Will it try to rally?  That may be difficult given the Fed cutting rates.

More likely, it breaks lower.  Should that happen – commodities will catch a bid.

A positive sign in my view is the broadening out of the stock market rally recently.  The number of S&P 500 stocks outperforming the index is the highest since 2002.

That is a start contrast to last year when we had the lowest number of stocks outperforming the index in history….

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Interesting fact….

At 5,703, the S&P 500 is now over 300 points above above the highest 2024 year-end price target from Wall Street strategists and 17% above the average target (4,861). And there’s still 3 months to go in the year.

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And…..

Valuations.  Well, according to this one metric – the Buffett Indicator – we are now back at all time highs last reached at the end of 2021…..We made it to 200% market to GDP again.

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The Fed is not the only central bank cutting rates.  It is in fact a global policy at this time.

In fact, Global central banks implemented a total of 28 rate cuts in Q3 2024, the most since Q2 2020.  All major central banks are cutting rates even as inflation risks are clearly still present and material.

Why do you suppose that is the case?

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It appears markets are pricing in quite a few rate cuts as well.

Interest rate futures are now pricing in 8 Fed rate cuts over the next 12 months, the most since 2008.

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Just how close will this election be?

Based on the past two elections – it will be a razor thin margin that will decide this elections.

From Strategas in a report yesterday:

Early voting has changed the structure of US elections.

Such close elections allow either campaign to claim the other candidate did not win.

• The 2016 election was decided by just 77k voters in three states: WI, MI, and PA (.06% of voters).
• The 2020 election was decided by an even smaller number, 65k, in WI, AZ, GA, and NE-2 (.04% of voters).

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What is the market telling us about the election…..

Well – let’s look at some facts.

Did you know:

• The S&P 500 has predicted 20 of the past 24 elections correctly (83%). If stocks are higher in the 3- month period ahead of the election, the incumbent party has generally won and vice versa.
• The US dollar has predicted 8 of the past 9 elections in that if the dollar is weaker in the 3 months leading into the election, the incumbent party has won.
• And the VIX is 8 for 8 in predicting the election based on when volatility peaks in the election year. If volatility peaks in the summer, the incumbent has won. If volatility peaks in October, the opposition party has won.

Let’s take them one by one.

• The S&P 500 has predicted 20 of the past 24 elections correctly (83%). If stocks are higher in the 3- month period ahead of the election, the incumbent party has generally won and vice versa.

So – it is imperative for the incumbent that the stock market stays up the last three months ahead of the elections.

Here is the S&P 500 over the past 6 months.  I has been consistently up since August.

Keep in mind that August saw the US Treasury run a $300 billion deficit in that month alone.  The Fed also telegraphed a rate cut at the September meeting. Both helped equity markets.

• The US dollar has predicted 8 of the past 9 elections in that if the dollar is weaker in the 3 months leading into the election, the incumbent party has won.

It is very helpful if the dollar is falling the last three months ahead of the election.  One way to get the dollar down is to cut interest rates.

The Fed tee’d up the rate cuts in late July for the September meeting.  On cue, the dollar started falling.

As I have noted, its hanging on for dear life at the bottom of this channel, but does look likely to break lower – likely helping the incumbents odds of reelection according to the historical data.

• And the VIX is 8 for 8 in predicting the election based on when volatility peaks in the election year. If volatility peaks in the summer, the incumbent has won. If volatility peaks in October, the opposition party has won.

Lastly, volatility in the market needs to be crushed.  This goes hand in hand with keeping stocks higher into the election.

It is important that the VIX peaks in summer/late July, not in October ahead of the election.

Here is the VIX.

As if right on cue, the Vix peaked in late July-early August and ahs been falling since. 

Based on the three historical data points with very strong records of predicting the result of an election, markets are saying Kamala Harris will win.

The rate cut and deficit spending is keeping the VIX surpressed.

The rate cut and deficit spending is keeping stocks elevated.

The rate cut hit the dollar and pushed it lower.  As I posted yesterday, it is on the verge of breaking down.

The question is – is Vice President Harris a traditional incumbent?

Technically, no.  Biden would be the incumbent.  It will be interesting to see how this plays out – but no doubt the policy moves of the Fed and Treasury have worked to support markets in favor of the incumbent.

An interesting development since the Fed rate cut has been the performance of the longer dated Treasury bonds.

They are up today slightly, but have been down every day since the Fed rate cut decision.

Why?

I can only speculate – but perhaps investors are willing to buy short term bonds, but unwilling to bet that over the longer term – inflation will be coming down.  If inflation will surge again, they will not want to hold longer dated/maturing bonds because bond yields will have to rise.

We will see how this plays out.

Below is the TLT – a 20 year Treasury ETF.  You can see it has been down every day since the Fed’s rate decision.

On the other hand, gold has broken out of the long consolidation that began in 2011.

This is the weekly chart below.

I have reminded clients and investors of the old adage “ the longer the base, the higher in space.”

In other words, the longer an asset bases or moves sideways, the more energy it builds to finally break out.  It won’t be a straight line, but this move will likely have legs.

As I type, CNBC is yapping on about China.

Just a few months ago – Wall Street declared China “univestable.”

Today everyone is a China bull.

Below is the China ETF.  It was down, down, down for years. 

Look at the move in the past few days.  Explosive on the back of stimulus bazooka.

Can it last?  Probably – but jumping in now may be a mistake when it is this overbought.

Remember, China’s stock market reached levels seen back in 2008.

Did you know that if you invested in Chinese Stocks back in 1993, you are actually down money?

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It’s interesting that China launched the stimulus bazooka right after the Fed cut rates by 50 bp.

The potential challenge for the Fed will show up if inflation begins to hook higher – like it did in the 1970’s.

I saw several notable experts worried about a second round of inflation after the Fed cut rates – and BEFORE the China news.  Chinese stimulus puts that risk higher of course.

Here is the US CPI overlay on the 1970’s CPI.
Of course we saw a second wave in the 1970’s – the red line.

The blue line is where we stand today.   

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Markets have been supported by the Fed rate cut and government spending.

They have also benefited from corporate buybacks.

We still have a rising corporate buyback trend ahead – but that does peak in early October……

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