Let’s front-run the recession. That seems to be the attitude of some investors at the start of September. Never mind the economic data does not support such doom and gloom. It’s certainly not in the August nonfarm payrolls , which came in at 142,000, slightly below expectations of 162,000 but better than Citi’s much lower estimate of 125,000 released Tuesday. There were downward revisions in June and July. The unemployment rate came in at 4.2%, in line with expectations. Bottom line: This data continues to support the soft landing. The soft-landing scenario holds that the economy is indeed slowing down, but not going into a tailspin. Some investors — bulls have taken to calling them “recessionistas” — seem hell-bent on finding something, anything, that indicates something far more sinister is happening. The recessionistas have been making such predictions every September and October for the past two years. They have been wrong — very wrong. Someday they will be right, but it is not at all clear that this is their moment. Unfortunately, the “recessionistas” are not the only problem for markets. Let’s front-run the September-October weakness Another chunk of investors is equally pessimistic, but for a different reason. They are agnostic on a recession but their attitude is, “Let’s front-run the typical September-October slowdown,” and at least on that front they have history on their side, especially the past four years. S & P 500 in September: It’s been ugly recently (rounded) 2023: down 5% 2022: down 9% 2021: down 5% 2020: down 4% Traders have been passing around factoids for several weeks, noting that: 1) September is not only the weakest month of the year, but the second half of September is the worst two-week trading period of the year for the S & P 500, according to Goldman Sachs. 2) Corporate buybacks, which have been exceptionally strong this year — likely a record for the S & P 500 — will likely slow soon because corporations will be entering blackout periods for several weeks heading into earnings. Seeing this, you might think the whole world has descended into madness and despair, but you would be wrong. The S & P 500 is less than 3% from its historic high. Most sentiment indicators still indicate fairly high levels of bullishness. And look at the volumes: Bulls have been trying to buy the dip all week but the firepower is not there. Volumes have been light. Aside from Tuesday , this has been largely a buyer’s strike, not a seller frenzy. Because valuations are still high, the ‘pain trade’ is down The biggest problem is the market is still expensive, and the price drops this week have not put a big dent in overall valuations. The pain trade is the trade that would cause the greatest discomfort to the most traders. Since valuations are high — still 20x forward earnings for the S & P 500 — and most traders remain on the bullish side, even as prices have been lower this week, the pain trade is for the markets to decline further. Two pieces of good news for bulls: 1) The market has already been softened up a bit by the belief that the job market is slowing . Citi did that for everyone with their Tuesday call that August nonfarm payrolls would come in at 125,000, below the 162,000 consensus. 2) For some key tech stocks, valuations have become far more reasonable. Take Nvidia , which is now 24% from its June high. NVDA YTD mountain Nvidia shares year to date I have emphasized for two weeks that the key to Nvidia is that investors are taking down the multiple on Nvidia, not the earnings. The forward multiple for Nvidia’s current fiscal year (February 2024 to February 2025) is now at 37.9 — well below the 48 multiple in June. The forward multiple for Nvidia’s next fiscal year (February 2025 to February 2026) is 26.5 — well below the 36 multiple in June. The recessionistas still have the rhetorical upper hand The bottom line is that the information so far is not recessionary, but the “recessionistas” seem to have the rhetorical upper hand. Maybe everyone should just relax and enjoy the correction. It’s been a while. The last time the S & P 500 had a 10% correction was July 31 to Oct. 27, 2023 (10.3% drop). We came close last month, down 9.7% on an intraday basis. That’s what happens with high valuations and a slower economy.
