The Zigmont Report (Daily Market Recap for 9/7/18)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $12B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.

The opinions expressed below are my own and do not necessarily represent those of Harvest Volatility Management, LLC.

Bearish week.  The S&P fell small today and that’s 4 consecutive drops for you counting at home.  The week-on-week drop was only about 30 points though so it’s a trivial win for the bears.  But a win is a win and the bears haven’t had many this year so this is a major event for them.  Like the other sessions of the week, there isn’t a compelling reason that explains the softness today.  Trump dropped a doozy of a China tariff bombshell in the middle of the session and that caused the S&P to drop about 10 points but the market was already down small at that point.  To be fair, the tape wandered around throughout the session.  The Trump news didn’t help the bulls obviously but I think today’s action is really an example of a random walk that finished down.

There’s no lesson buried inside the action.  It’s the same-old, same-old as far as I can tell.

The thing worth (re)mentioning is that the knee-jerk, dip-buying behavior is still missing in action.  When will those investors do what they do best?  That’s a question that keeps the bears awake at night.

Let’s move on to the August nonfarm payrolls data (201k vs 190k est & 147k prior revised from 157k).

That’s a nice strong number (again).  Equity futures dropped 5 points and Treasury yields climbed across the curve.  The increasing strength of the labor market pressures the Fed to act more hawkishly and so a *fourth* hike for the year is becoming the consensus expectation.

For the last three years, the Fed has been guiding us to expect 3 hikes per year.  And the world ended up playing out the way the Fed projected and everything went as planned.  It looks like the world is finally playing out differently than the Fed (and the market) expected.  Things are heating up a little faster now.

The September FOMC decision on the 26th will deliver another 25 bip hike (the 3rd of the year).  The markets will be all over the statement and the presser afterward…. for confirmation of the new expectations, which is a hike every quarter… and also confirmation of the terminal rate.  We’re in the 3ish zone right now… the market’s going to want to get more precise on that number soon.

Anywho, the point I’m making is that change is coming.  The market is expecting the Fed to *apply the brakes harder* than we’ve all expected for a while.  Even if the Fed does exactly what the market expects, this is a recipe for higher volatility and (probably) equity-negative pressures.

We shall see in the run-up to the meeting and the proof will be in the pudding on the 26th.

Have a great weekend, see you Monday,