Market Update – August 12th, 2024

Author:  Joe Maas, CIO SPG Advisors LLC

Monday, August 12th, 2024

Financial Markets

Stocks partially recovered from the sell-off following the unexpectedly soft July jobs report, as lower-than-expected weekly unemployment claims helped soothe market concerns. By Friday, August 9th, the S&P 500 ended the week nearly unchanged, while the Nasdaq Composite declined by -0.18%, and the Dow Jones Industrial Average dropped -0.6%. Bonds also declined, with the Barclays Aggregate Bond Index down -0.78% for the week.

Market News

Initial Claims. The initial jobless claims report, often overlooked, became a focal point for markets this week, following last week’s unexpected jump in the July unemployment rate to 4.3%, which spooked stocks. For the week ending August 3rd, initial jobless claims came in at 233,000, which was below expectations and marked a decrease of 17,000 from the previous week. Within the weekly jobless report, the US Department of Labor did state that the number of insured unemployed persons as of July 27th stood at 1,875,000—the highest level since November 2021.
 
Economists largely agree that the labor market is softening, so the debate has now shifted to whether this represents a normalization of labor conditions or the early stages of a recession.

Source: US Department of Labor

Q2 Earnings

Q2 Earnings. With 90% of S&P 500 companies having reported their earnings, results have largely exceeded expectations, with the annual earnings growth rate currently standing at 10.3%, and revenue growth at 4.9%. Only two sectors have reported negative earnings growth. The materials sector saw earnings decline by -8.6% compared to the previous year, while consumer staples experienced a more muted earnings decline of -0.1%.
 
On the other hand, utilities have shown the strongest earnings growth, with a notable 20.2% increase in earnings, although sales growth was more modest at 3.1% year-over-year. Healthcare, financials, and consumer discretionary followed utilities, reporting strong annual earnings growth. Overall, second quarter earnings have been a positive fundamental factor for US large-cap stocks despite the recent market volatility.

Source: FundStrat

ISM Services

 July’s ISM Services Index presented a positive shift, rising by 2.6 points to 51.4. This uptick followed two months out of the last three in bearish territory, signaling modest growth in the services sector, a crucial sector for the US economy. July proved to be a month of growth for 10 out of 18 industries, with no distinct advantage observed between cyclical and noncyclical sectors, as seen below.

Also notable within the index were the Business Activity Index, which rose 4.9 points to 54.5, and the Employment Index, which increased from 46.1 to 51.1. These gains suggest that the recent uptick in the unemployment rate might have been overreacted to. Uncertainty in some regard does remain though, as many firms in the survey are adopting a cautious “wait and see” stance ahead of the upcoming Presidential election.
 
Given that services play a significant role in driving US economic growth, this small rebound in the ISM Services Index is a promising indicator for those hoping for a soft landing for the economy.

Anxious Index

The Anxious Index is a quarterly survey that gauges professional forecasters’ probabilities of a real GDP decline in the next quarter, as well as labor market and GDP growth estimates. Currently, the outlook for the U.S. economy is more mixed than it was three months ago, however economists are not projecting a recession. 

Economists have slightly revised their third-quarter real GDP growth estimates down to 1.9% annually, while increasing their fourth-quarter estimates to 1.7%. Unemployment expectations have been revised upward through 2027, with forecasters projecting a 4.1% unemployment rate by the end of 2024, 4.3% in 2025, and 4.2% in both 2026 and 2027—aligning with a soft-landing scenario. 

Forecasters expect monthly job gains to average 143,900 in the third quarter, a slightly lower figure than the previous quarter’s estimate. Finally, expectations of contraction in the fourth quarter have decreased to 21%, however probabilities for Q1 2025 were revised upward for Q1 2025 to 27.3%. While this indicates that a recession is not the most likely scenario, it remains a possibility if economic growth deteriorates in upcoming quarters.

Source: Federal Reserve Bank of Philadelphia

Recession Indicators

This week, four recession indicators were updated: the Philadelphia Fed ADS Index, the ISM Services Index, the Employment Trends Index (ETI), and the Anxious Index. The ADS Index remained slightly bearish, staying below 0. In contrast, the ISM Services Index turned bullish, signaling growth in the service sector in July.
 
The ETI showed some softness but continues to indicate a generally positive outlook and normalization of labor markets. Meanwhile, the Anxious Index shifted from a bullish stance last quarter to a neutral position, reflecting forecasters’ projections of a softer labor market and a 21% chance of a GDP contraction in Q4 2024.
 
With three indicators bullish, three bearish, and two neutral, our overall view remains mixed. Moving forward, one of the most significant catalysts will be the expectations and actual implementation of Federal Reserve rate cuts through the end of the year, as well as the market’s response to these cuts.

Summary

This week, initial jobless claims came in lower than expected, helping markets recover from the recent sell-off. The ISM Services Index showed a modest rebound, signaling growth in the services sector after a few sluggish months. On the other hand, the labor market is showing signs of softening, with the highest level of insured unemployed persons since November 2021. Despite this, some metrics like the Employment Trends Index suggest this softening represents a normalization of the labor market rather than moving towards a full-blown recession. Q2 earnings have been largely positive, with most sectors surpassing expectations, though recession indicators remain mixed, keeping our market view cautious.

We appreciate your continued trust.

Thank you,

Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA

The information contained herein is general in nature. It does not take into account your particular investment objectives, financial situation, or needs. It is provided for illustrative or informational purposes only, and should not be construed as advice. Our advisors can meet with you to discuss your retirement plan.