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markets

Can the Fed Chair Trigger a Selloff?

That’s a half-serious question.

As inevitable is the S&P 500’s long-term up-and-to-the-right trend, so are the corrections.

They happen every year: When we make our financial plans and build our investment portfolios we have to account for drawdowns.

We’ll save the more complex discussion of diversification through time and asset class for future newsletters.

For now, let’s just make that point clear: The market will correct by 10 percent give or take this year. The major factor in these situations is you and your preparation.

Paul Harris, a partner and portfolio manager with Harris Douglas Asset Management, shares specifics about what you can do right now to position for the rest of 2024 in a recent StockPick Interview.

As we’ve detailed the last two days, history compiled by Carson Group suggests the correction will happen later this year but not this month.

The S&P 500 has been green nine in a row and 11 of the past 12 Julys, and it’s been the best month for stocks over the past 20 years, with an average return of 2.3 percent.

Including July 1, 2024, the first trading day of July has been positive for the S&P 500 for 14 years in a row, 10 of the past 20, and 28 of the past 31.

Monday was a step in the right direction – as the First of July has been for 14 years in a row, 19 of the past 20, and 28 of the past 31.

It was below average with a gain of 0.27 percent, but we’ll take it.

And the first half of July is usually pretty decent too – there just aren’t many bad days.

The first half of July has been characterized by low volatility and moderate gains for the S&P 500.

We have an interesting run this week, starting today with Federal Reserve Chair Jerome Powell’s participation in a policy panel discussion at the European Central Bank Forum on Central Banking 2024 in Sintra, Portugal.

That event is scheduled to start at 9:30 a.m. ET.

And the US Bureau of Labor Statistics will follow up shortly with the release of its Job Openings and Labor Turnover Survey for May – the JOLTS report – at 10:00 a.m.

Job openings in April were at their lowest level since 2021, and the consensus expects another decline in May. Down from a peak of 12.2 million in March 2022, openings are still historically high.

Wednesday is a particularly loaded one ahead of the Fourth of July. And note that the New York Stock Exchange will close early, at 1:00 p.m., so we can get the party started.

But first…

Federal Reserve Bank of New York President John Williams is making his own appearance at the ECB Forum in Portugal at 6:30 a.m., and then data on initial claims for unemployment insurance will be released a day early, at 8:30 a.m.

That’s followed by services PMI reports from both S&P and ISM as well as factory orders data from the US Census Bureau.

And then we’ll get the minutes from the Federal Open Market Committee’s June meeting at 2:00 p.m.

Markets are closed for literal fireworks on Thursday, of course.

This week’s grand finale is the BLS report on the employment situation for June, including the number of new jobs created, the unemployment rate, and hourly wages.

Other incoming data reveal some cooling.

This data speaks directly to our central bankers’ mandate, so they and we must pay at least some attention.

deep dive

It’s a Rate-Decreasing Environment

And it’s time to update allocation decisions.

Paul Harris says we should be prepared for rising volatility as the US presidential campaign heats up into the summer and the fall.

With the first debate of the season already behind us even before the two major parties’ quadrennial conventions, this is gonna be a long one.

That doesn’t necessarily mean “bad,” particularly for investors, traders, and speculators.

In fact prediction markets make these types of things even more interesting for people who think in terms of price and how to get paid.

But how should we think about this election, in this market, in this environment?

Harris, who co-founded Harris Douglas Asset Management in 2019, notes that the US has grown substantially faster than the rest of the world in the post-COVID period – though that outperformance has come with a cost: inflation.

It’s come down from its peak but the last 1 percent is going to be the most difficult, Harris observes. And that has the Federal Reserve in a difficult position – one made even more difficult because of the presidential election cycle.

There are signs the economy is cooling, but to act in July or in September risks criticism that central bankers are favoring the candidate of one party over the candidate of the other.

US GDP growth has exceeded the rest of the world by a significant margin in the post-COVID-19 period.

Bottom line, according to Harris: “I think they probably will cut at least once this year, maybe not twice.

“But I think the US is slowing down like the rest of the globe. And I think that's the issue.”

For investors, traders, and speculators that means “we're no longer in a rate-increasing environment.”

“I think we're really in a rate-decreasing environment,” Harris says.

And people have to think about such an environment very differently when it comes to asset classes and investment decisions.

deep dive |
July 2, 2024

It’s a Rate-Decreasing Environment

ENERGY

US Energy Independence Gets Even More Real

We should agree on some basic terms of discussion.

This is a good headline: U.S. Energy Independence Set New Record In 2023.

That’s not from some Biden campaign email, or even the government agency responsible for publishing the underlying data.

It’s courtesy of Forbes, and it introduces an article written by my friend and former colleague Robert Rapier. There’s the bias – but both the bias and the object of it are qualified.

Robert’s an engineer with a quarter century of experience in the chemicals, oil and gas, and renewable energy industries.

His background includes chemical engineering work related to oil refining, oil production, synthetic fuels, biomass to energy, and alcohol production.

It’s literally not his job to bullsh*t.

According to data released by the US Energy Information Administration, US energy production exceeded consumption by a record amount in 2023.

According to Robert there are two ways to define “energy independence.”

The first is “zero imports,” or true energy independence, where we import literally zero energy.

The second is “energy surplus,” which reflects the reality of a globalized energy marketplace.

Robert considers the second more useful. It defines “energy independence” as “producing more energy than we consume.”

“Based on that definition,” Robert writes, “even if we import some energy, the fact that we produce more than enough to satisfy our needs would mean the US is energy independent.”

This is what Donald Trump is referring to when he says we gained energy independence during his term.

“If we consider this definition,” Robert clarifies, “in 2019 the US had an energy surplus for the first time since at least the 1940s.”

According to data compiled by the US Energy Information Administration, US production of natural gas and crude oil have continued to increase under President Joe Biden.

Imports peaked almost 20 years ago and have declined steadily since 2005. That’s a function of the Shale Revolution, which continues to drive production today.

US crude oil and natural gas production have continued to grow, with the net energy surplus reaching 5.94 quadrillion billion thermal units, the highest level in at least 70 years.

Here’s Robert:

It’s important to understand that the following two statements are each true under a consistent definition of energy independence.
  1. If the U.S. is not energy independent under Joe Biden, then it was never energy independent under Donald Trump.
  2. If the U.S. was energy independent under Donald Trump, then energy independence has grown to record levels under Joe Biden.

“Under no scenario,” he concludes, “did the U.S. become energy independent under Trump and lose it under Biden.”

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