While September is historically a weak month for stocks, we remain encouraged that major support levels are holding and that economically cyclical sectors continue to show leadership.

Inflation Remains Stubbornly Above the Fed’s Target

A surge in gasoline prices in August boosted headline inflation. Core inflation (excludes food and energy) continued to moderate, largely driven by slower price growth in core commodities prices, including another decline in used car and truck prices. On a y/y basis, CPI picked up 3.7% from 3.2% in the prior month, core CPI eased to 4.3% from 4.7% in the prior month, the slowest pace since September 2021.

While inflation remains stubbornly above the Fed’s 2% target, important components of inflation, including shelter inflation which has a 44% weight in the core, suggest further disinflation to come. Indeed, the market is assigning a 97% probability of no rate hike at the September 20th FOMC meeting.

Labor Market Indicators Remain Healthy

A soft landing for the economy is predicated upon reducing inflation back to the Fed’s 2% target while still maintaining enough health in the labor market to support future economic growth. Consequently, we are paying close attention to labor market indicators in addition to inflation readings.

Encouragingly, labor market indicators remain healthy, despite job openings falling off record highs and new hiring losing momentum. Weekly jobless claims are a timely and accurate labor market indicator, and with this week’s initial claims for unemployment insurance at 220,000, they remain historically low. In addition, the Manpower Employment Outlook Survey for the fourth quarter showed continued strengthening in hiring plans. The net share of employers expecting an increase in hiring activity rose to 36%, up for the third consecutive quarter. Hiring plans are stronger than in any other expansion since 1976. These and other indicators show that labor demand is still robust, consistent with continued economic growth over the near term.

Small Business Optimism Remains Below Historical Average

The NFIB Small Business Optimism Index fell in August, down for the first time in four months. It has been range-bound since mid-2022, which is well below the historical average and below the level at the start of the last recession. The index dipped 0.5% from a year ago, consistent with some deceleration in economic activity this quarter. Labor quality and inflation continued to head the list of small firms’ most important problems, followed by taxes.

Stocks Continue to Consolidate Gains

Historically, September is a weak month for stock performance and it’s typical to see stocks consolidate gains after big upward moves. Consequently, we remain encouraged that major support levels are holding and that cyclical sectors continue to show leadership.