Weekly Review for week ending 8-2-24
Saying the stock market faced significant challenges last week is an understatement. Weak labor market data and mixed earnings results likely contributed to the downturn. Both the S&P 500 and the NASDAQ recorded their third consecutive week of declines with the sell-off peaking on Friday, leaving the S&P 500 down 2.4% for the week and 5.7% below its record high from July 16. The NASDAQ entered correction territory, down 10% from its July 10 peak. Overall, the S&P 500 managed to post a 1.1% gain in July, marking its eighth positive month out of the past nine, while the NASDAQ declined by 0.8%. I think in the interest of context, it’s important to note that the S&P500 and NASDAQ were still up 12.09% and 11.76% on the year (FactSet)
Stocks seemed to have been largely affected by the U.S. jobs report (JOLTS), which showed job growth slowing for the third month in a row. July saw a gain of 114,000 jobs, falling short of the 12-month average of 215,000 and below expectations. The unemployment rate rose to 4.3%, the highest in nearly three years, from 4.1% in June. Despite the uptick in unemployment, the labor force participation rate increased to 62.7%, with 420,000 more people entering the workforce (BLS.gov). It seems to me that the market saw this and essentially “freaked” out because it triggered something called the Sahm rule.
The Sahm Rule is a recession indicator that signals the start of a recession when the three-month average unemployment rate rises by 0.5 percentage points or more above its lowest point in the previous 12 months?. July’s unemployment rate increase from 4.1% to 4.3%?, would typically trigger the Sahm Rule and suggest a potential recession1. However, this increase is primarily due to a surge in labor force participation, with 420,000 people entering the workforce? (BLS.gov)??. This influx can elevate the unemployment rate without indicating economic distress, suggesting that the current rise in unemployment may not reflect a true recessionary trend as explained by Claudia Sahm creator of that rule in an email to CNBC last week. The market did not see this nuance.
Surprisingly, the U.S. Federal Reserve maintained its interest rate policy, refraining from cuts for another month. I’ll give them the benefit of the doubt that at the time of their ruling at the beginning of the week they had no knowledge of the JOLTS report which was published later in the week. Chair Jerome Powell hinted at a potential rate reduction in mid-September if inflation continues to ease as I’ve been mentioning for a few weeks now. However, after the recent labor market data, its seems quite likely that Septembers potential rate cut, would be .50% instead of .25%. That probability is currently at 88.5% based on the CMEGroups fed watch probability tool. The Fed's updated policy statement acknowledged the weakening labor market and inflation risks, contributing to the10-year U.S. Treasury yield falling to 3.80%, its lowest level in eight months2.
In June, pending home sales increased by 4.8%, exceeding expectations and recovering from a 2.1% decline in May. This rise, reported by the National Association of Realtors (NAR), indicates more people are signing contracts to buy homes, reflecting growing confidence in the housing market.
This surge should suggest that as more homes are available, it’s easier for buyers to find properties without facing intense bidding wars, improving conditions for buyers, leading to more contract signings. It’s also important to note, the Pending Home Sales Index is a key indicator of future home sales, as these contracts typically precede actual sales by one to two months, hopefully affecting home prices and mortgage rates soon.
Looking Ahead
The Federal Reserve's decision to hold interest rates steady reflects an arguably overly cautious approach. August's employment figures will be closely watched, given their impact on both the number and severity of the interest rate cuts we see this year. A September rate cut at this point is almost guaranteed in my opinion, and is arguably overdue. We may see a second rate cut in December, and as economic data comes in, I’m sure the conversation will be whether that cut is .25% or .50%.
This coming week is reasonably quiet economically so we will see to what extent last week’s market volatility continues. Im sure there will be a lot of discussion on the SAHM rule, recession and whether the Fed moved too slowly.
If you’ve only recently joined my email list, you’ve missed out on many insights and updates that I've been sharing each week. Be sure to visit my blog to explore past content that you might find valuable.
Feel free to reach out if you have any concerns or questions.
Have a great week,
1https://www.investopedia.com/what-is-the-sahm-rule-8637564
2https://www.federalreserve.gov/newsevents/pressreleases/monetary20240731a.htm
The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
For index definitions click here
AdTrax 6861980.1 Exp 7/25