8th July 2024

Weekly Index Movement

Aussie All Ords+0.7%

A positive week for stocks last week leading to another all time high for US equities. But the most interesting piece of news came from the employment report on Friday.

The headline number looked good at +190,000 but the wage growth was more interesting to me

Wage growth is important as employees earning more wages will spend more adding to inflation. As you can see, wage growth has steadily been falling since early 2022, albeit at a slow pace.

The Fed thinks wage growth at 3.2% is consistent with 3% inflation. That kind of makes sense. This month’s number at 3.9% is still above the target but it is getting there and the trend is on target.

Which means the Fed could soon be looking at rate cuts.

We will get CPI inflation on Thursday this week and that might confirm/deny these assumptions.

Sahm Rule

I’ve never heard of the Sahm rule. But it is supposed to signal pending recessions if it gets up to 0.5 and it is 0.4 now. It’s all about changes in annual employment numbers.

So I decided to take a look at it:

The present reading of 0.4 is very close to 0.5 and in my mind is the same thing.

There were 7 recessions between 1964 and 2019 and the Sahm rule at 0.4 and 0.5 caught them all. Mind you, it also predicted 3 recessions that did not happen.

One way of looking at this is Sahm is very close to predicting a recession. Another is to say Sahm is wrong 30% of the time.

I’m going to put it in my useless indicator bucket. Much like a yield inversion when it comes to predicting recessions.

But, it does show the US economy is slowing, even I can’t deny that, and when you couple this with wage growth trending towards target, then it does open the door for the beginning of an easing cycle in September.

The next FOMC meeting is July 31. It is unlikely the Fed cuts then, but barring an unusually high CPI report this week I do think Chair Powell will give the nod on July 31st to rate cuts at the next meeting in September.

Which won’t make any difference to anything because the market has already factored this in. It might give the Aussie a bit more tailwind because we are talking of adding to rates here and not cutting.

First Half Recap

If you feel like your portfolio didn’t do much last quarter, you are not alone. Unless you have a big weighting to large-cap Tech, the chances are you went backwards. Most sectors and even countries did not have a great 3 months. But you read this missive every week, so I’m sure you had most of your money in large-cap Tech and performed nicely.

Here is a nice breakdown of all sectors for you so you can see what I mean.

What can we expect in the second half ?

The S&P500 is now up 16.7% year to date and made a new all time high on Friday.

The long term annual return for stocks is just about 10% per year, so we are on track to exceed that this year. Which begs the question of how much more we can expect in the second half.

Even though we are above the average, we are not yet at statistically significant levels. 1 standard-deviation takes us to 31.3%. Since 1928 the S&P500 has exceeded that only 13 times, but only once since 2000 (2013 was +32.2%).

The median S&P500 return is 14.8% and we have already bested that level as well.

However, if you exclude losing years and only look at winning years, the return is +21.0% and we are not at that level yet. The 1 standard deviation here takes it up to 33.3 before returns become statistically significant.

What does all this mean – if we look at all years, the current gains are unusually strong, but if we look at just up years, it still has room for further gains.

If the index goes on to add another 3-4%, 2024 would just be another typical up year. And it would not be statistically unusual for it to add another 15% in the next six months.

My own view is we are more likely to add another 5% than 15%, but 15% is not out of the realm of possibility.


Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.