VTI - 3 Predictions For The Fourth Quarter

2023-09-21 10:48:58 ET

Summary

• We are rapidly coming to the end of the third quarter and the market is turning increasingly uncertain.
• Investors should have myriad worries as we enter the final quarter of 2023. These include an inverted yield curve, numerous negative economic indicators, and challenges in commercial real estate.
• Three predictions for Q4 are laid out in the paragraphs below, as well as how I am positioning my portfolio for what is likely to be a volatile quarter ahead.

We have control over when, how, and where to plant a seed, not over what it will become .”? Mokokoma Mokhonoana.

September is quickly winding down, and the Dog Days of summer are quietly fading into the rearview mirror. We are also coming to the end of the third quarter. Unfortunately, more " Shades of 2007 " are beginning to appear in the economy and the markets as the full effects of a 525bps Fed Funds boost since March of 2022 start to be felt. On Wednesday, the yield on the 10-Year Treasury moved up to 4.4% and now is at a level not seen since November 2007.

As we are just over week away from the start of final stanza of 2023, here are three predictions for the quarter ahead.

Job Growth Goes Negative

The jobs market has already been behaving " hinky" over the past couple of months. Full-time jobs fell by more than 550,000 in July according to the BLS monthly jobs report. They also fell slightly in August. The headline jobs numbers in both cases managed to stay in the " black" only because part-time positions surged.

In addition, reported jobs from those two monthly jobs reports may turn out to be not nearly as strong as originally reported. The Bureau of Labor Statistics or BLS is getting just less than a third of their employer surveys returned to it these days to compile this report. This means the department has to make a lot of assumptions in their original job estimates. Just like most humans, they tend to base their views of the immediate future based on the immediate past.

Therefore, they tend to miss " i nflection points" in the jobs markets, which in itself is always a lagging economic indicator. Every single BLS monthly jobs report this year has subsequently been revised down. I see no reason why the initial reports from July and August will not share the same fate. In addition, we now have a huge UAW jobs action against the Big Three automakers demanding huge wage hikes and other benefits within a new four-year contract.

While the UAW has so far implemented limited walk outs at strategic plants, the strike is already taking an increasing toll and causing other non-striking working workers to be laid off. As I stated in my recent article " Three Ludicrous Things ," I expect this strike to last well into October if not longer. This should help trigger a negative monthly job print by the end of the year.

The Consumer Finally Cracks

Average hourly wages have increased by 13% since the new administration took office early in 2021. Unfortunately, inflation has risen some 17.4% over that time. This means the average American has lost a considerable amount of buying power over the past 10 plus quarters due to surging prices across the economy.

Consumer spending has been goosed and maintained thanks to the huge excess savings ($2.1 trillion) piled up in the economy during the Covid pandemic and the assorted government spending programs in response to the outbreak and lock downs.

Unfortunately, that taxpayer largess has now been spent down. The personal savings rate now stands at 3.5%, the lowest levels since the immediate aftermath of the Great Financial Crisis. According to a recent CNBC survey , some 61% of Americans are now living paycheck to paycheck.

Robust retail sales in July were largely driven by personal savings being drawn down from $852 billion to $706 billion during the month. Two thirds of the .6% increase in the August Retail Sales report was due to surging gasoline prices. With savings gone and the jobs market deteriorating, it is hard to see the consumer (which accounts for nearly 70% of all economic activity) not finally cracking in the months ahead.

The Stock Market Experiences A Correction

If it not the consumer that cracks and brings upon a recession and a stock market correction, there are a list of other things that could do so. The yield curve remains deeply inverted, something that has historically been very accurate in predicting upcoming recessions. In addition, the Leading Economic Indicators have been negative for 16 straight months now. Something that hasn't happened since 2007/2008, just before the Great Financial Crisis.

We also have the continued conflict in Ukraine that could escalate in unforeseen ways and myriad economic challenges in China, which is second largest economy in the world. However, the deterioration in commercial real estate {CRE} worries me the most about the current economy. As I articulated in late July, CRE is showing significant signs it will be the " subprime" of the next significant economic downturn.

We have also seen weak breadth all year within the market. The rally has largely been powered by gains by the mega-caps dubbed the Magnificent Seven . These gains have not been widespread as the small cap Russell 2000 (RTY) as of Wednesday's market close was up just less than four percent on the year.

Now some of the Magnificent Seven like Apple ( AAPL ) are starting to show some signs of weakness. Outside of energy, thanks to surging crude prices, there has been little new market leadership to take the Seven's place.

Given this, my view is the market will see a stock market correction at some point in the fourth quarter of this year. A correction is triggered by a 10% decline in trading levels from the highs. This means the NASDAQ would have to dip just below 14,380 from its all-time highs of July 18th and/or the S&P 500 would have to pull back to the 4,150 level from its recent highs in late July.

Portfolio Strategy

Given my economic outlook calls for recession over the next 12 months and a stock market correction in the upcoming quarter, my portfolio is extremely conservatively positioned with approximately half my holdings in short term treasuries yielding 5.5%. With an economic contraction on the horizon, valuations at extreme levels from a historical perspective, and the Fed Funds rate now north of five percent; it seems the correct and prudent move.

Old men are dangerous: it doesn't matter to them what is going to happen to the world .”? George Bernard Shaw.

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