Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Monday, Aug. 5. The Bottom Line segment of today’s podcast starts at (4:21), with ‘Stocks on the Contrarian Radar’ commencing at (8:15) for listeners who want to skip ahead.
State of Play
Futures are getting beaten to a pulp and the concern is suddenly very real that circuit breakers will come into play as they did during today’s trading session in Japan. The Nikkei had its worst trading day since 1987. As we look at our board of indicators for signs of direction at 0630, things look very ugly indeed:
Stock index futures are sharply lower. The riskiest part of the market are seeing the worst of it — Russell 2000 and Nasdaq down 4% and change — but the selling is by no means isolated as S&P 500 futures are pointing to a loss of almost 3% at the open;
Commodities are also getting beaten up. WTI crude oil is down 2% to trade around $72/barrel with copper down 2% as well. Gold and silver aren’t even holding up. Gold is unchanged and silver is down almost 3%;
It’s the same story in cryptoland, only worse. Bitcoin is down 15% to trade around $51,500, its lowest level since January;
Then you have the bond market, which is suddenly where everybody wants to be. Major rally here, with the 2-year yield down 11 basis points to 3.76% and the 10-year down 5bps to 3.73%. And yes, the yield curve is just about uninverted a just 3bp separate the 10- and 2-year.
Today’s Known Events
Economic data has suddenly become paramount, with recession concerns now front and center in the minds of investors.
To that end ISM Non-Manufacturing PMIs are out at 1000. Economists who were surveyed expect this figure to have rebounded in July, from 48.8 to 51.4. That would place it back into expansion territory as the 50 level is what separates expansion from contraction. There are separate readings of Non-Manufacturing Prices and Non-Manufacturing Employment but neither have economist estimates.
Non-manufacturing is just another word for services. If this can hold up then maybe all this recession talk is a little premature just yet.
We do have some earnings as well:
Tyson Foods (TSN 0.00%↑) and Carlyle Group (CG 0.00%↑) report before the open at 0930;
After the close at 1600 we’ll hear from Palantir (PLTR 0.00%↑), Hims & Hers Health (HIMS 0.00%↑), Avis Budget Group (CAR 0.00%↑), and Yum China Holdings (YUMC 0.00%↑);
Office REITs Realty Income (O 0.00%↑) and Simon Property Group (SPG 0.00%↑) also report after the close.
The Bottom Line©️
The narrative swiftly shifted last week, thanks to a more dovish Fed, disappointing PMIs, and then non-farm payrolls. Suddenly nobody seems to want any part of riskier assets like tech and growth. Bonds and defensive sectors like consumer staples stocks have rallied. At least last week. Judging by the action so far today consumer staples are not quite holding up their end of the bargain anymore.
Friendly reminder that at the end of 2022 everybody was also convinced we were entering recession. It didn’t happen then. It might still happen now, but you still need three main elements:
A drastic slowdown in hiring, to the point where non-farm payrolls print negative numbers. The July figures released on Friday showed six figures-worth of jobs being created. That may not be enough to keep the country at full employment (and indeed the unemployment rate shot up to 4.3% from 4.1% as a result), but it is still positive especially during a traditionally slow month of hiring;
Pullback in consumer spending. This logically follows point 1 as people get laid off and have to cut spending. Others may keep their jobs but fear of job losses creates the same effect;
Negative GDP growth. This follows points 1 and 2 and is the final statistic needed to make the recession official. Specifically, two consecutive quarters of negative GDP growth. (Strictly speaking, even then it isn’t quite official yet as you need to have sign off from the National Bureau of Economic Research to officially make it official).
In other words, everything kind of hinges on the job market. This is why Thursday’s initial jobless claims will be very closely watched. Far more closely than before. Last week’s came in a little hot. If we have a repeat it could get ugly. But that is still three days away and things are already looking very ugly.
You also have the situation in the Middle East. But that isn’t really anything new as Israel and Iran have been at war through proxies for some time. Oil markets are certainly not treating it as anything new, judging by futures.
Stocks on the Contrarian Radar
The Contrarian move right here is quite clear, which is to buy stocks. Does anybody have the conviction to do it? Things could certainly get worse before they get better.
It might help if you zoom out a bit and keep in mind that where economic data is concerned we are still in expansion. That is unlikely to change from a few days of selling in the stock market. Yes, the market is a forward-looking indicator and what we’re seeing now are clearly concerns that the economy will fall off a cliff, and soon. But we aren’t there yet.
Maybe a time to take a punt on something like the van Eck Semiconductor ETF (SMH 0.00%↑)? Or maybe not because it holds Intel (INTC 0.00%↑). One could certainly just buy Nvidia (NVDA 0.00%↑) outright.
Those are all quite aggressive moves. For something a little more conservative you could look to something like JPMorgan Chase (JPM 0.00%↑), which is down multiple percent in the pre-market. JPM may lose business in a recession, but it won’t go out of business. Too big to fail and all that.
The same holds true in certain international jurisdictions. The Swiss government will not let UBS (UBS 0.00%↑) go out of business for example. Not after the engineered the takeover of Credit Suisse last year.
Housekeeping
Obviously this is not investment advice (duh). Do your own research, make your own decisions.
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