Unemployment on the Rise and Historically Red September Is Here!

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Market News and Short-Term Predictions

The stock market does what it has been doing best this year, bouncing back after a minor pullback. The 52-week highs are within 2% again.

For those that are bearish, the one interesting fact about September is that it is historically bearish. Actually, it is the most bearish month since 1945 with an average return of -0.73%! But if you asked me I think it doesn't hold that much weight to long-term investing. If anything as a long-term investor you should look forward to September so you can buy stocks for cheaper!

In regards to macroeconomic data that may support a pullback, unemployment ticked higher to 3.8% from 3.5% a month prior as labor force participation picked up. Total nonfarm jobs of 187,000 were above expectations of 170,000 but below this year’s average of 236,000. This came as the labor force participation rate ticked higher to 62.8%, the highest level in the post-pandemic era. The pickup in employees returning to the workforce adds to the narrative around increasing caution on the labor market, alongside a slowdown in quits rates and job openings.

How might this affect the Fed's decision on rates going forward?

I would expect that a slowdown in the labor market would incrementally add to the case for the Fed to pause its rate-hiking cycle. In fact, an easing in the jobs market, particularly slower wage gains, is largely what the Fed has been targeting with its rapid increases in interest rates.

Markets are also still pricing in a pause in the Fed rate-hiking cycle. And market pricing of rate cuts continues to be pushed out to May 2024, although the probability of a March cut also increased this past week after the softer jobs data.

Outside of a black swan event, I am still bullish on the stock market through 2023. If any trouble pops up I would expect it to hit in 2024/2025 based on keeping rates elevated for some time which tends to break something in the economy eventually.

Lessons to Be Learned

Today I wanted to talk about my thoughts on an ideal type of stock that I would like to own and explain the high-level rationale. I tend to be attracted to what I call conservative growth or compounders.

Some people like to look at the hottest stocks and the talk of the town to get ideas of what they should be buying. My ideal stock is a well-established brand and high-quality business that is growing both top line and bottom line at a rate of +10-20% and is priced at a valuation metric that is reasonable.

You may ask why do I not want the fast hyper-growth stock? Well if I could buy the hyper-growth stock before everyone is talking about it that may be a different story but that requires a bit of luck. When everyone is talking about it, the valuation is usually baking in unrealistic or extremely high expectations already.

I find buying an already established stock with a decent valuation that has pulled back momentarily gives a good risk-adjusted return. Let's say a stock is trading at a P/E of 20 and is expected to grow its net income at 20% in the next five years. If their multiples tend to stay around the P/E of 20, after 5 years that stock has doubled in price. Not to mention if it pays a dividend that would be the cherry on top. Also with a compounded stock that had this profile, I wouldn't have to worry about a 50-80% drawdown in the stock price.

I would be one of the greatest investors of all time if I could consistently generate 20% returns every year in the stock market.

Of course, I don't shy away from higher-growth stocks, as they can also result in great returns but I believe they are more speculative and you will deal with larger swings due to their sensitivity to market conditions and the uncertainty around that high growth.

Also, this is why you don't necessarily see me loading my portfolio with companies that have lower valuations, but they have low growth expectations. If a stock is growing its profits at 5% annually and isn't trading at a massive discount to fair value, then you would be better off buying an index fund!

Granted this piece is more of an opinion. Some people like growth, others like value. I happen to like stocks that fit right in between the two :)

Portfolio Update

Stock/Option Watchlist

Stocks: TSLA, LLY, CHDN, ROK, ADSK, PTLO, SBUX

Options: SPLG, PLTR, BAC, MPW, F, AAL, T, DISH

See premium membership for details on interested entry points/strike prices/current wheel positions.

Options Trading Portfolio

Closing Trades

I ended up pocketing the $10 related to the covered call I sold in AAL last week. No other closing trades.

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