Weekly Market Update – August 02, 2024

Quick Takes

• It was a definitive risk-off week, as a combination of disappointing earnings, weaker-than-expected economic reports, and specifically a stinker of a nonfarm payrolls report sent stocks reeling and bonds soaring. 
• The S&P 500 Index fell -2.1% for the week, the tech-heavy Nasdaq Composite Index fell -3.4%, and the Russell 2000 Index sank -6.7%. The Bloomberg U.S. Aggregate Bond Index finished the week up +2.4%, its biggest weekly gain since March 27, 2020.
• The week’s economic data saw Factory Orders sink, the ISM Manufacturing PMI drop to an 8-month low, Construction Spending fall for the second straight month, job quitting fall to nearly 4-year low, and the unemployment rate hit its highest level since October 2021. 

Source: Bloomberg. Data as of August 2, 2024.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Bad news is bad news again as stocks sink and bonds soar

The subpar corporate earnings, weak manufacturing reports, and dud of a jobs report sent bond yields and stock prices plummeting. With investors suddenly shunning risk, the S&P 500 Index fell -2.1% for the week, notching the first three-week losing streak since mid-April. The technology-heavy Nasdaq Composite Index suffered an even steeper weekly loss, falling -3.4% and leaving it in correction territory (off more than 10% from its July 10 all-time high) for the first time since October 2023. The S&P 500 Technology sector was the worst sector during the week, down -5.4%, and marking its third straight weekly loss. The Russell 2000 Index, which had flourished the prior three weeks amid a rotation from technology and growth stocks to more cyclical, value, and smaller stocks, sank -6.7% last week. 

Friday’s jobs report, in particular, sent bond prices spiking as the yield on the 10-year U.S. Treasury note fell to 3.79%, its lowest level since December. The odds that the Fed will deliver a half-point rate cut in September jumped to nearly 70% on Friday from 22% on Thursday, according to the CME FedWatch Tool. The 2-year U.S. Treasury yield fell -50 basis points to finish at 3.88%. That left the spread between the 2-year and 10-year yield at -9 basis points, the least inverted level since July 12, 2022. Bond prices and yields move in opposite directions, and the Bloomberg U.S. Aggregate Bond Index finished the week up +2.4%, its biggest weekly gain since March 27, 2020, when Covid was shutting down the global economy. The Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) was up in kind, gaining +2.3% for the week.

Chart of the Week

The monthly Employment Situation report showed a sharp deceleration in July. On Friday, the Labor Department reported that U.S. employers added just 114,000 new Non-Farm Payrolls (NFP) during the month, far short of Wall Street expectations for 175,000. That was down from 179,000 the prior month, which itself was revised lower from 206,000 jobs, and May job gains were lowered slightly to 216,000 from 218,000. Private-sector jobs added in the month were paltry 97,000, the smallest increase since the spring of 2023 and the second smallest gains since 2020. Health Care, Social Assistance, as well as Hotels and Restaurants, led the hiring. Under the surface, there were some signs for concern. The Unemployment Rate unexpectedly climbed to 4.3%, the highest level since October 2021, up from 4.1% the prior month, where it was expected to stay. The unemployment rate had been as low as 3.4% just 15 months ago. Inflation watchers noted that Average Hourly Earnings rose +0.2% for the month, under expectations for a +0.3% rise, which is where they were the prior month. Year-over-year, Average Hourly Earnings slowed to +3.6% from +3.8%, also under expectations (+3.7%) and hitting the lowest level since May 2021. The Fed would like to see wage growth slow to around +3% annually or less, a level it sees as consistent with low inflation. Average Weekly Hours slid to 34.2 from 34.3 where it was expected to remain after three straight months at that level. Labor-Force Participation inched up to 62.7% from 62.6%, where it was expected to stay.

U.S. unemployment rate at its highest since October 2021

U.S. unemployment rate, January 2021 through July 2024

Source: U.S. Bureau of Labor Statistics, CNBC.

Economic Review

• The Institute for Supply Management’s (ISM) Manufacturing PMI fell for a fourth straight month in July, hitting an 8-month low of 46.8% from an unrevised 48.5% the month before, short of expectations for a 48.8% reading. The manufacturing PMI has now been stuck in contraction territory for 20 of the last 21 months (levels below 50 indicate contracting economic activity). New business fell with the key New Orders component down to 47.4% from 49.3% the prior month. The Production component fell to 45.9% from 48.5%, its lowest level since the height of the pandemic in May 2020. The Employment component sank to a four-year low of 43.4% from 49.3%. The Prices Paid index, a measure of inflation, inched up +0.8 points to 52.9%. 
• Following the bleak ISM Manufacturing PMI report, the final reading of the S&P Global U.S. Manufacturing PMI for July slipped to 49.6 from 51.6 the prior month. The reading was below the 50.0 no-change mark for the first time in seven months, signaling a deterioration in the health of the manufacturing sector. Paramount in the worsening manufacturing was the first reduction in New Orders for three months and at the fastest deceleration in 2024 so far.Employment also rose but at a slower pace. Input Costs increased markedly amid reports of higher prices for energy, freight, labor, and raw materials, although the rate of inflation eased to a four-month low. Output Prices increased only marginally and at the slowest pace for a year.
• The Employment Cost Index (ECI) eased to a seasonally adjusted +0.9% in the second quarter. That was below expectations for a +1.0% pace and far off the +1.2% unrevised rate of the first quarter. The ECI is the Federal Reserve’s preferred measure of wage gains, and the lower than expected rise should help ease Fed concerns that a strong labor market may keep inflation above the Fed’s target. The +0.9% rate corresponds to a +3.7% annualized total compensation growth rate, down from +4.8% in Q1. Year-over-year, compensation climbed +4.1%, down from +4.2% in the prior quarter, which is the slowest annual increase since 2021. The Fed wants to see costs slow even further to about a +3.5% rate or so. Wages and benefits rose an average of +2.7% a year in the three years prior to the pandemic. Wages and Salaries account for about 70% of compensation costs.
• The June Job Openings Labor Turnover Survey (JOLTS) showed Job Openings slipped to 8.184 million from 8.230 million (revised up from 8.140). That was above expectations for 8.000 million but far off the peak of 12 million in 2022. Job openings are an indication of the health of the labor market and the broader U.S. economy. Most of the increase was in government. The ratio of Job Openings to Unemployed Workers held steady at 1.2, down from a peak of 2.0 in 2022 and at the pre-pandemic level the Fed wants to see it at. The Number of People Quitting Jobs fell to a 4-year low of 3.3 million from 3.4 million the prior month, and far off the record 4.5 million job quitters reached in late 2021. The Quits Rate held steady at 2.1%. That’s the lowest level since September 2020 and another sign the labor market has softened. People tend to quit less often when the economy softens and jobs become harder to find. The Hiring Rate dipped to 3.4%, a cycle low.
• The Conference Board’s Consumer Confidence Index rose to 100.3 in July from 97.8 the prior month (revised down from 101.4) and was above expectations of 99.7. Consumer confidence tends to signal whether the economy is getting better or worse. Confidence has retreated since the start of the year and sits well below the pre-pandemic high of 135.8. The Present Situation gauge fell to 133.6 from 135.3 the prior month (which was revised down from 141.5). The Expectations gauge — which reflects consumers’ six-month outlook — jumped to 78.2 from 72.8 (revised down from 73.0). Levels below the 80 mark on the expectations index often signal a recession within the next year. In good times, the index can top 120 or more. 
• U.S. Factory Orders sank -3.3% in July, below expectations for -3.2% and down from the unrevised -0.5% rate the prior month. Factory Orders Ex-Transportation were up a scant +0.1%, but an improvement from the prior month’s unrevised -0.7%. Meanwhile, Durable Goods Orders dropped -6.7%, under expectations for -6.6% which is where it was the prior month. The bright spot of the report was the important Core Capital Goods Orders (Nondefense Capital Goods Excluding Aircraft), a proxy for business spending, which rose +0.9% versus +1.0% the prior month. Shipments of Core Capital Goods Orders, which feed into Gross Domestic Product (GDP), were up +0.2% for the month versus a +0.1% rise the prior month.
• Texas factory activity fell again in July, with the Texas Manufacturing Outlook Survey dropping to -17.5 from an unrevised -15.1 the prior month, short of expectations for -14.2. It was the 27th consecutive month with a contractionary reading and put Dallas as the fourth of five regional Fed surveys to show a month-over-month decline. But underneath the Fed’s 11th District headline measure, the components were quite mixed. For instance, New Orders were already negative and fell significantly. The Production and Shipments components also drove the headline index down. The Employment indicators were mixed, with the number of employees jumping 10 points into expansionary territory but hours worked falling further into contractionary territory. On the other hand, indicators of future activity point to improving optimism, with the index for Future Conditions Six Months Ahead jumping to +21.6 from 12.9 and lifting the six-month average further into positive territory to its highest level since 2022. The Texas Service Sector Outlook Survey improved from last month but remained in negative territory, coming in at -0.1, up from -4.1 the prior month. 
• The Chicago Purchasing Managers Index (PMI), a barometer for the Chicago region’s business and manufacturing conditions (also known as the Chicago Business Barometer), fell to 45.3 in July from an unrevised 47.4 the prior month but was above expectations for a 45.0 reading. Readings below the 50 level indicate contraction. This is the eighth consecutive reading in contraction territory. New Orders, Employment, Inventories, Production, and Order Backlogs all signaled contraction. Only the Prices Paid and Supplier Deliveries components showed expansion.
• According to the Case-Shiller S&P CoreLogic 20-City Home Price Index, U.S. housing prices hit yet another all-time high in May, marking 16 straight monthly increases, as the index increased a seasonally adjusted +0.34%, above expectations for a +0.30% increase, and up from the prior month’s +0.39% pace (revised up from +0.38%). On a year-over-year (YoY) basis, home prices in the 20 major metro markets in the U.S. were up +6.81%, above expectations for +6.60% but down from the prior month’s +7.25% annual gain. New York took over the top spot from San Diego with the biggest year-over-year home-price gains, up +9.4% and +9.1%, respectively. Once again, home prices grew the slowest in Portland, at a 1.0% annual rate. All 20 cities registered annual increases for the sixth consecutive month. While housing affordability is near its lowest level in four decades, a very limited supply of homes for sale is supporting house price appreciation.
• Like the Case Shiller HPI, the competing Federal Housing Finance Agency (FHFA) House Price Index (HPI) showed U.S. home prices decelerate in May, coming in unchanged (+0.0%) compared to the +0.3% pace the prior month (revised up from +0.2%). Expectations were for a +0.2% increase. The government data showed home prices up +5.7% year-over-year compared to 6.3% the prior month. “The slowdown in U.S. house price appreciation continued in May amid a slight rise in both mortgage rates and housing inventory,” the agency said.
• The National Association of Realtors (NAR) reported that Pending Home Sales bounced +4.8% in June, beating expectations for a +1.5% gain and sharply up from the prior month’s -1.9% rate (revised up -2.1%). Year-over-year sales were down -7.8%, below the -6.5% annual pace the prior month. From a regional perspective, all four regions were positive, led by a +6.3% increase in the South, while the Northeast trailed with a +3.0% monthly gain. According to Lawrence Yun, chief economist at the NAR, “The rise in housing inventory is beginning to lead to more contract signings.” 
• The Commerce Department reported that Construction Spending fell for a second straight month to -0.3% in June, far short of expectations for an increase of +0.2%, but up from the prior month’s -0.4% (although that was revised sharply lower from -0.1%). Over the past year, construction spending is up +6.2%, versus an annual rate of +6.4% the previous month. Total Private Construction was down -0.3% for a second straight month, and total Public Construction was down -0.4% from +0.5% the prior month. Private Residential Spending fell -0.3% month-over-month while private Nonresidential Spending slipped -0.1% month-over-month. The report showed that single-family construction fell -1.2% and multifamily construction was up +0.1%.
• Weekly MBA Mortgage Applications fell -3.9% for the week ending July 26, following the prior week’s -2.2% decline. The Purchase Index was down -1.4% following a -4.0% drop the prior week. The Refinance Index sank -7.2% after inching up +0.3% the prior week. The average 30-Year Mortgage Rate was unchanged at 6.82%.
• Weekly Initial Jobless Claims rose +14,000 to 249,000 for the week ending July 27, above expectations for 236,000. The prior week was unrevised. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose to 1,877,000 in the week ending July 20, above consensus estimates for 1,855,000. Last week’s reading of 1,851,000 was revised down to 1,844,000.

The Week Ahead

The calendar was packed last week and sparse this week. There are just a handful of key reports scheduled that include the ISM and S&P Global U.S. Services Purchasing Managers Index (PMIs), Consumer Credit, Wholesale Inventories, and the U.S. Trade Deficit. The Federal Reserve’s consumer credit data (the Senior Loan Officer Opinion Survey on Bank Lending, or SLOOS for short) is also reported on Monday. Australia’s central bank will make the next global interest-rate move. Second-quarter earnings season continues with around 80 S&P 500 companies releasing results, including Airbnb, BioNTech, CVS Health, Caterpillar, Costco Wholesale, Eli Lilly & Co., Devon Energy, Monster Beverage, Novo Nordisk, Occidental Petroleum, Palantir Technologies, Super Micro Computer, Uber Technologies, Walt Disney, Wynn Resorts, and Zoetis.

Did You Know?

THE STREAK ENDS – The S&P 500’s -2.3% decline on July 24, 2024, was the index’s first one-day drop of more than 2% since February 21, 2023. The just-ended 356-trading day streak without a 2%+ drop was the longest since the record 949-trading day streak ended in February 2007 (Source: Bespoke).

APPROACHING UN-INVERSION – The spread between the yield on the 10-year and 2-year treasury notes has been inverted (10-year yield lower than 2-year yield) for a record 500+ trading days, but on Friday, August 2, the spread closed at just -0.09 which is its least inverted level since July 12, 2022, when the streak was just six days old (Source: Bespoke).

PERSONAL FINANCE FUNDAMENTALS – California legislators recently passed Assembly Bill 2927. Once signed by Governor Newsom, California will be the 26th state to require a personal finance course for every high school student graduating in 2031 and beyond (Source: EdSource).

This Week in History

GULF WAR – On August 2, 1990, Saddam Hussein invaded Kuwait. Over the next two-and-a-half months, the U.S. stock market lost -19%, and many experts forecasted a protracted bear market. Yet, just one year later, U.S. stocks were up +26.9% (Source: The Wall Street Journal).

Asset Class Performance

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.