Market Update – August 19th, 2024

Author:  Joe Maas, CIO SPG Advisors LLC

Monday, August 19th

Financial Markets

Stocks picked up more ground last week as inflation came in soft and retail sales came in strong, hushing market concerns that the US was nearing a recession. As of close on Friday, August 16^th, the Nasdaq Composite ended the week 5.29% higher, while the S&P 500 ended 3.93% higher, the highest weekly gain so far in 2024. The Dow Jones Industrial Average followed, up 2.94%, while the Barclays Aggregate Bond Index rose 0.55% in the week.

Market News

July CPI: 

July’s Consumer Price Index came in slightly below expectations, with annual inflation coming in at 2.9% and core inflation at 3.2%, both showing declines from June’s annual data. On a monthly basis, both headline and core inflation rose by 0.2%.

By category, grocery prices were up 1.1% from a year ago. Gasoline prices remained flat in July and were down -2.2% year-over-year, while electricity prices increased by 0.1% in July and were up 4.9% from the previous year.
 
The auto market continued to show signs of softness, with new car prices down -1% and used car prices down -10.9% compared to a year ago. Shelter costs, one of the largest and most persistent components of inflation, remained 5.1% higher than a year ago, though the rate of inflation in this category has been slowing.

Source: BLS
 
As inflation approaches the Federal Reserve’s 2% target, markets have become less reactive to positive inflation reports and more sensitive to labor market data – the other half of the Federal Reserve’s mandate. Following this week’s robust retail sales figures, the probability of rate cuts in the near term has actually decreased.
 
Between August 9th and August 16th, markets shifted from pricing in two rate cuts at the September Federal Reserve meeting to a 74.5% chance of one rate cut. This shift follows what appears to have been an overreaction to July’s unexpectedly high unemployment rate of 4.3%. Moving forward, markets will be expecting continuing disinflation and on high alert for employment data that may or may not be showing early signs of a slowdown.

Source: CME Group FedWatch
 
July PPI. Before the softer-than-expected CPI report, investors received an early signal through the Producer Price Index, which often reflects inflationary pressures that are likely to be passed on from producers to consumers. In July, annual producer inflation dropped sharply to 2.2%, down from 2.7% in June. Core producer inflation, excluding food, energy, and trade costs, rose 3.3% year-over-year.
 
On a monthly basis, overall producer inflation came in lower than expected, with a 0.1% increase, while core PPI rose by 0.3%. The cost of goods for producers increased by 0.6% in July, while service costs declined by -0.2%, a shift from previously hotter service inflation. This lighter producer inflation data lowered investor concerns ahead of the CPI release.

Retail Sales. 

July’s retail sales numbers exceeded expectations, driving stocks higher last Thursday. Spending increased by 1% from June to July and was up 2.7% compared to July 2023. Most categories saw an increase in spending last month, with auto-related sales leading the way, up 3.6% in the month. Excluding auto, retail sales were still up by a healthy 0.4% in July from June.
 
Retail spending on electronics and groceries also saw gains last month, rising by 1.6% and 1%, respectively. Spending at restaurants and bars continued to rise at a healthy pace as well. This robust month of retail sales suggests a possible “goldilocks” scenario, where the Fed achieves its goal of bringing inflation down without causing the labor market to overheat or weaken too much.

August Consumer Sentiment. 

The University of Michigan’s preliminary Consumer Sentiment Index saw a slight increase in August, though it remains marginally lower than a year ago. Most components of the index were relatively stable compared to July, but political developments led to significant shifts this month.
 
As election news dominated the headlines in the latter half of July and into early August, sentiment among Democrats rose by 6% following the announcement of Harris replacing Biden as the Democratic presidential nominee. In contrast, Republican sentiment declined by 5% this month. The survey also revealed that 41% of consumers believe Harris is the better candidate for the economy, compared to 38% who favor Trump. Previously before President Biden bowed out of the race, Trump held a 5-point lead over Biden on economic matters.
 
This election season is set to remain a key focus for markets, as each party’s distinct priorities could influence economic growth, corporate earnings, inflation, geopolitical events, and more.

Source: University of Michigan

Summary

Last week, stocks gained ground as July’s inflation came in softer than expected, and retail sales exceeded forecasts, easing recession worries. The Consumer Price Index showed annual inflation at 2.9%, with core inflation at 3.2%, both down from June. The Producer Price Index also reflected a sharp drop in producer inflation. Meanwhile, retail sales surged by 1% month-over-month, led by auto-related purchases, fueling hopes for a “Goldilocks” economy. Consumer confidence rose slightly in August, as consumers cited recent changes in perceptions about the upcoming presidential election.
 
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.