Our Daily Commentary from August 25 summarizes a SimpleVisor stock scan, highlighting companies with high sales exposure to China. The article states: “Once again, trade tensions are heating up with China as President Biden signed an executive order to limit U.S. investments in Chinese technology companies for national security concerns. China says a response is coming.” It appears China’s retaliation is to go after America’s largest company, Apple. On September 6, China ordered its central government agencies to ban the use of iPhones. Per the WSJ, The directive is the latest step in Beijing’s campaign to cut reliance on foreign technology and enhance cybersecurity.” China expanded its retaliation on Thursday morning to include state companies and other agencies from using iPhones.
China must balance trade retaliation with what is best for its struggling economy. Recently, China lowered home down payment requirements, encouraged second property purchases, and told banks to lower mortgage rates. They also cut rates twice this year, cut taxes on stock market transactions, and told banks to buy stock shares. The Apple trade retaliation works against China’s economic goals. Ergo, it will be interesting to see how China responds if Biden takes additional retaliation actions. China must consider the U.S. has more trade leverage. The U.S., as shown below courtesy of Trading Economics, is China’s largest customer, accounting for 15% of its exports, almost four times that of the next non-China customer, Japan. But, the U.S. is only China’s third largest importer (7.2%) behind South Korea and Japan.
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The Big Bond Swap
We have recently discussed in our newsletter, radio show, and podcasts that we were looking to make a swap in our bond portfolios. The following video, with Michael Lebowitz and me, explains why we swapped out of the iShares Treasury Bond ETF (TLT) and into a U.S. Treasury Bond.
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Payroll Growth Sliding Downward
The graphs below from Alpha Beta Soup show that the decline in the growth rate of jobs is following a similar pattern as all recessions since 1968. To line up start dates, allowing for a better comparison, the graph uses the number of months from when the yield curve first inverted. As we have shared in the past, all yield curve inversions have ultimately resulted in recessions. However, in most cases, the recession does not begin until the yield curve uninverts. Based on the graph, we might expect negative job growth in early 2024. In that case, market anticipation of Fed rate cuts would lower short-term rates, likely causing the yield curve to uninvert.
The next graph goes back further in time but anchors the historical data to the start of recessions. While the start date for the recent data in the graph is arbitrary, you can see payroll growth is in line with prior instances. This graph forecasts a recession in eight months.
Low Volatility Continues
Per the Bespoke graph below, it has been 136 trading days without a daily change, up or down, of 2% or more in the S&P 500. That marks the longest streak of less than 2% daily volatility in over five years.
Jobless Claims Remain Low
Initial Jobless Claims remain relatively low despite other signs the labor market may be weakening. Yesterday’s 216K in new claims was below the 230K expected and the upwardly revised 229K from the previous week. It is the lowest print since February. A higher number of Baby Boomers are retiring, which may alleviate the need for some companies to let go of employees. Further, if those let go find work quickly, they may not file for unemployment claims. Regardless of the reason, jobless claims, a leading labor market indicator, remain strong. As shown, they are slightly higher than the 2022 lows but well below the historical average of 260k
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