Market Update – August 5th, 2024

Author:  Joe Maas, CIO SPG Advisors LLC

August 5th, 2024

Financial Markets

Stocks sold off last week as recession concerns intensified following a weak July employment report and other bearish indicators, and the absence of a definitive timeline for rate cuts from the Federal Reserve. As of close on Friday, August 2nd, the Nasdaq Composite fell -3.35%, the Dow Jones Industrial Average by -2.1%, and the S&P 500 by -2.06%. Conversely, bonds rallied as yields fell, resulting in the Barclays Aggregate Bond Index gaining 2.04% over the week.

This negative momentum has the potential to persist in the short term. As of Monday, it appears that more negative momentum may be ahead, with stocks continuing to sell off and volatility rising sharply today. We will monitor these developments closely and adjust as necessary.

Market News

July Fed Meeting

Last week, the July FOMC meeting took place on Wednesday afternoon, where Fed Chair Jerome Powell announced no policy changes but indirectly suggested that a September rate cut could be appropriate. Powell also noted that the current labor market is no longer a likely source of inflationary pressure and emphasized the Fed’s aim to remain apolitical in this upcoming presidential election.

Looking ahead, the September Fed meeting appears to be the most likely scenario for the first rate cut. Following the Fed meeting and a soft July jobs report on Friday, the market is now pricing in a 79.5% chance of 50 basis points of rate cuts at the September meeting.

Source: CME Group FedWatch, as of 8/2/24

July Employment

The labor market unexpectedly cooled in July, with the unemployment rate rising to 4.3%, leading to a sell-off in stocks on Friday. Furthermore, nonfarm payrolls increased by +114,000, falling short of the +170,000 expected. Slight gains were observed in healthcare, construction, and transportation/warehousing sectors, while the information sector experienced job losses.

Average hourly earnings rose by +0.2% for the month, a 3.6% increase from a year ago, while the average workweek declined by 0.1 hours to 34.2 hours. Although this is just one month of weak data, it could be an early sign that the US may be past due for a less aggressive stance of quantitative tightening.

Source: US Bureau of Labor Statistics

Consumer Confidence

The Conference Board’s Consumer Confidence Index posted as expected for the month of July, increasing slightly from June to 100.3. Breaking it down further, the Present Situation Index, reflecting current business and labor market conditions, fell to 133.6 from 135.3. In contrast, the Expectations Index, indicating the short-term outlook, improved to 78.2 from 72.8, still below the 80 mark potentially signaling a recessionary outlook.

Consumers remain concerned about high prices, interest rates, and economic uncertainty. Younger (under 35) and older (55+) consumers showed increased confidence, while the 35-54 age group saw a decline. Higher-income consumers remained the most confident. Average 12-month inflation expectations stayed stable at 5.4%, while the share of consumers expecting higher interest rates ahead fell to 50.3%, as more consumers become aware of potential rate cuts in the coming months.

The survey also noted a shift in spending habits, with reduced plans for discretionary services like gambling and travel. Although this was an increase in overall confidence from June, it is fairly bearish given the reports of reduced discretionary spending and the negative outlook consumers have in the near term.

ISM Manufacturing

July’s ISM Manufacturing Index fell short of expectations, coming in at 46.8. This marks the fourth consecutive month of contraction in the manufacturing sector, indicating ongoing weakness. Every one of the six largest manufacturing industries including Machinery; Transportation Equipment; Fabricated Metal Products; Food, Beverage & Tobacco Products; Chemical Products; and Computer & Electronic Products contracted in the month. The persistent decline in the ISM Manufacturing Index, coupled with a weakening labor market and contraction across the major manufacturing industries, continues to raise concerns about the outlook for economic conditions ahead.

Source: Institute for Supply Management

Recession Indicators

The Philadelphia Fed Aurora Diebold Scotti Business Conditions Index (ADS), a high-frequency business conditions index that incorporates factors like jobless claims, trade sales, and more, serves as one of our weekly recession indicators. When the ADS is above 0, it signifies positive conditions and when readings are below 0, the ADS indicates negative conditions.

On Friday, the ADS turned negative for the first time since April, partially due to the soft jobs data from July. Also last week, the ISM Manufacturing Index continued to show bearish signs. Given these updates, our overall stance, based on these nine indicators, is now slightly bearish, with four negative indicators, three positive indicators, and one neutral.

Summary

Stocks saw a sell-off last week due to intensified recession concerns following a weak July employment report and other bearish indicators, coupled with the absence of a definitive timeline for rate cuts from the Federal Reserve. The July Fed meeting left policy unchanged but hinted at a potential rate cut in September, with the market now pricing in a 79.5% chance of 50 basis points of cuts. July’s labor market data showed an unexpected cooling, with the unemployment rate rising to 4.3% and nonfarm payrolls increasing by only +114,000, below expectations.

The Consumer Confidence Index slightly increased to 100.3, though concerns about high prices and economic uncertainty persist. The ISM Manufacturing Index fell to 46.8, indicating continued contraction in the manufacturing sector. Finally, the Philadelphia Fed ADS Index turned negative, contributing to a slightly bearish overall economic outlook according to our recession indicators.

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.