By James Ooi/ uSMART Market Strategist

Over 13 years of experience in buy-side and sell-side of capital markets

Former Fund Manager of renowned asset management firm
Focus on fundamental analysis and macro-outlook for US & Singapore markets
SGX Academy trainer

US Macro Strategy Weekly Report – 4 September 2023

【This Week’s Market Outlook】:

• The 2Q 2023 earnings season is wrapping up, with most of the significant earnings reports already published. Consequently, US stock prices in September will be primarily influenced by economic data.
• The U.S. stock market is closed on Monday due to Labor Day. The key economic data for this week includes durable goods orders on Tuesday, ISM Non-Manufacturing Purchasing Managers' Index (PMI) on Wednesday, and the Federal Reserve Beige Book and initial jobless claims on Thursday. Additionally, several Fed officials will make public speeches this week.
• September typically stands out as the worst performing month of the year, averaging a loss of 1.26% over the past 25 years. Therefore, it is surprising to see that NAAIM Exposure Index, which represents the average exposure of active fund managers to US Equity markets, is at a current level of 61.19 (Figure 1). This figure is lower than the year-to-date average of 67.82, suggesting that US active fund managers are adopting a risk-off approach as they enter September.
•  

Figure 1: NAAIM Exposure Index vs S&P 500

Source: NAAIM, 30 Aug 2023

• While the S&P 500 saw three drawdowns exceeding 10% in 2022, 2023 witnessed only two relatively smaller drawdowns of 7.8% and 4.8% (Figure 2). Consequently, there are limited opportunities for investors to position themselves in 2023.
• Moreover, if investors are adopting a risk-off approach this year by increasing their exposure to bonds and defensive sectors, or reducing their portfolio's equity market exposure, their performance will lag behind the benchmark indices. For example, take the AGG ETF - iShares Core US Aggregate Bond ETF, which typically mirrors the performance of the U.S. investment-grade bond market and has only yielded a 1.08% return year-to-date.

Figure 2: S&P 500’s drawdowns in 2022 and 2023

Source: Tradingview, 1 Sep 2023

• Most analysts now predict that we have witnessed the steepest year-on-year decline in S&P 500 earnings in Q2 2023, and earnings year-on-year growth are expected to improve from Q3 2023 onward. This suggests that September might be the final down month of the year. As Q3 2023 earnings begin to release in October, combined with favorable market seasonality in the final quarter of the year, we may witness a meaningful stock rally in Q4.

Figure 3: S&P 500 Earnings Forecast

Source: Yardeni, 28 Aug 2023

Figure 4: Monthly performance of the MOVE Index over the past 25 years.

Source: uSMART, Bloomberg, 4 Sep 2023

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