Weekly Market Update – August 09, 2024

Quick Takes

• It was a wild week in the markets, but in the end stocks and bonds were little changed. Global stocks were rocked on Monday, with the S&P 500 suffering its worst one-day decline since September 2022. But Thursday had its best one day gain since November 2022. 
• By the end of the week, the S&P 500 Index was down a razor thin -0.04%, the tech-heavy Nasdaq Composite Index fell -0.2%, and the Russell 2000 Index slipped -1.47%. The Bloomberg U.S. Aggregate Bond Index finished the week off -0.8%.
• A poor nonfarm payrolls report, bad manufacturing data, plus a -12% plunge by Japanese stocks ignited a global selloff on Monday. But better than expected services activity, looser lending standards by banks, and fewer jobless claims helped ease recession fears and help stocks recover much of the losses early in the week.

Source: Bloomberg. Data as of August 9, 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.

Tumultuous week ends with recovery from early losses

A volatile week in the markets began with swift and dramatic losses early but recovered just as quickly by the end of the week. In the end, most major indices ended the week little changed. Technically, the S&P 500 Index was negative, ending the week with a razor-thin -0.04% decline, which extended its losing streak to four straight weeks, the longest losing streak since last September. It took the biggest back-to-back days of gains in 2024 at the end of the week to virtually erase the week’s early losses. That included Thursday’s +2.3% return, which was the best single day in nearly two years. That was quite a change from Monday when the S&P 500 slumped -3%, posting its worst trading session since September 2022. Monday’s rout was caused by a combination of recession worries sparked by a poor nonfarm payrolls report, plus a -12% plunge by Japanese stocks ignited by a surprise interest rate hike by the Bank of Japan‘s and an unwinding of the yen carry trade. The recession fears receded by the end of the week, particularly after initial jobless claims declined by their largest level since September on Thursday morning. The technology-heavy Nasdaq Composite Index was also little changed, slipping just -0.2% for the week. The Russell 2000 Index wasn’t able to reach the same level of recovery as the larger cap indices, ending the week down -1.4%. 

Similarly, overseas equities saw big swings during the week, yet ended with small changes. Developed market international stocks (as measured by the MSCI EAFE Index) dipped -0.3% for the week, and the MSCI Emerging Markets Index actually rose +0.2%. Europe ended up for the week, more than recovering deep declines in the beginning of the week. Even Japan, the epicenter for the losses, recouped much of the severe losses from Monday, ending down about -2% for the week. Brazil led emerging markets, helping offset slight declines in India and China.

Better than expected Service Sector PMIs from ISM and S&P Global helped relieve some of the recession concerns early in the week. The Federal Reserve’s Senior Loan Officer Opinion Survey showed fewer loan officers reported tighter lending standards in the second quarter, also quelling recession concerns. And later in the week jobless claims declined more than expected to further improve investor sentiment. As a result, bond yields rose through the week. When stocks were sinking on Monday, the yield on the 10-year U.S. Treasury note fell as low as 3.66%. But the better economic data pushed yields back up. At the end of the day on Thursday, the 10-year Treasury yield actually traded above 4% before backing off Friday and settling at 3.94%, 15 basis points higher than the prior Friday. The rise in yields resulted in the Bloomberg U.S. Aggregate Bond Index ending the week lower by -0.8%. The Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) was up slightly, gaining +0.2%.

Chart of the Week

Despite the end of the week rebound, the potential remains for market tumult to persist longer. So-called ‘systematic funds’ that include ‘risk parity,’ ‘volatility–controlled,’ and ‘trend following’ strategies derisk their portfolios by selling stocks when volatility increases. These funds typically buy equities during stable markets with low volatility and sell them when markets become turbulent, which can exacerbate market swings. Analysis by Nomura Securities International estimates that systematic funds dumped more than $100 billion worth of U.S. stocks since the middle of July, when market volatility began to pick up. Monday’s sudden spike in volatility alone resulted in about $70-$80 billion of that selling. Moreover, the influence of volatility-controlled funds extends across different asset classes. As volatility increases in one asset class, in last week’s case, Japanese stocks seeing a one-day -12% plunge, not only is that market impacted, volatility in other asset classes, such as bonds and currencies, can also rise. It is a bit paradoxical that strategies that aim to manage risk by controlling volatility often amplify the market movements, particularly during periods of extreme volatility. 

Volatility-Controlled Funds Are Selling Stocks

Systematic funds are derisking as realized and implied volatility spike

Source: Bloomberg.

Economic Review

• The Institute for Supply Management’s (ISM) Services PMI rose to 51.4% in July from an unrevised 48.8% the prior month. That was just ahead of expectations of 51.0% and a welcome indication of economic expansion in the critical services sector, particularly in light of last week’s disappointing manufacturing report. Service-oriented companies, such as restaurants and retailers, employ the majority of Americans. Moving back over a reading of 50 (data above 50 indicates economic growth) helps counter the fear that the U.S. might be sliding into a recession. The New Orders index jumped to 54.1% from 47.3%. The Employment index rebounded to 51.1% from 46.1%, ending five straight months in contraction. The Production index moved up to 54.5% from 49.6%. On the inflation front, the Prices Paid index only inched up to 57.0% from 56.3%, further evidence inflation continues to cool.
• Like the competing ISM report, the S&P Global U.S. Services PMI was in expansion territory in July, although it slipped slightly to 55.0 from 55.3 the prior month. The U.S. service sector began the second half of the year as it ended the first, seeing a marked expansion of New Orders. The Employment component improved as the growth in new business activity also encouraged firms to take on extra staff, as did positive Expectations for the Future. Meanwhile, the rate of Input Cost inflation quickened, but companies increased their Selling Prices at a softer pace amid competitive pressures. New Orders from Abroad increased for the first time in six months, albeit only marginally and to a much lesser extent than total new orders.
• U.S. Consumer Credit rose just $8.934 billion in June, far below expectations for $10.0 billion and the prior month’s $13.946 billion (which was revised higher from the initially reported $11.354 billion). That’s a +1.9% annual growth rate, down from the +2.7% annualized growth rate the prior month. Typically, the use of credit only rises that slowly around a recession, a sign that households are feeling more financial distress. Growth for revolving credit, such as credit cards, fell -1.5% from a +6.1% rise the prior month, the second decline in the past three months. The last time that happened was in 2021. Nonrevolving credit, which tends to be much less volatile than revolving credit and includes auto as well as school loans, increased +3.4% following the prior month’s +1.4% rise. The data from the Federal Reserve is not adjusted for inflation and does not include mortgage loans, which is the largest category of household debt. Americans have been increasingly relying on credit cards and other forms of financing to support spending as wage growth slows, pandemic savings fade, and higher prices continue to bite.
• The Census Bureau reported Wholesale Inventories for May rose +0.2%, down from +0.6% the prior month and in line with expectations. Year-over-Year (YoY) inventories were up +0.1%, ending ten straight negative YoY readings. Inventories are goods produced for sale that have not been sold yet. Inventories have only added to GDP growth once in the past five quarters. Wholesale Trade Sales were down -0.6%, a sharp decline from the +0.4% the previous month and far below an expected +0.3% rise. Wholesale inventories data isn’t adjusted for inflation. Year-over-Year Wholesale Trade Sales were up +1.9%. The Inventory-to-Sales Ratio rose to 1.37 months, from 1.35 the prior month but down from 1.40 a year ago. The ratio reflects how long it would take a company to sell all the goods sitting on warehouse shelves. The lower readings vs. last year suggests it’s taking less time for companies to sell their goods.
• According to the latest Senior Loan Officer Opinion Survey (SLOOS) from the Federal Reserve, it continued to show progress, as a lower share of banks reported tighter lending standards in the second quarter relative to the first quarter of 2024 on all loan categories. The net percentage of banks raising credit standards for commercial and industrial loans fell to 7.9% in the second quarter. That is down from 15.6% the prior quarter and marks the lowest level since the Fed started tightening monetary policy in early 2022. For Commercial and Industrial (C&I) lending to large and middle market firms, demand for C&I lending strengthened relative to the first quarter, and the net share of banks that reported tighter lending standards receded to 8%. That is well-off last year’s peak of 51%, an 85 percentage point annual decline. For Households, demand weakened for most loans, yet more banks reported an increased willingness to make consumer installment loans, especially at large banks. The July SLOOS included a set of special questions asking each bank to examine how lending standards today compared against their historical range since 2005. Banks reported standards today are at the tighter end of the range for all loan categories. 
• According to the U.S. Bureau of Economic Analysis, the U.S. Trade Deficit narrowed to -$73.1 billion in June from -$75.0 billion the prior month, which was the widest in 19 months. That was still wider than the expected -$72.5 billion, though. Smaller trade deficits help contribute to economic growth, while larger deficits inhibit growth. Exports, primarily oil and natural gas as well as aircraft, rose by +$1.9 billion. The U.S. imported more drugs, computer chips, and telecommunications gear in June. Oil imports declined. Year to date, the Trade Deficit increased $22.7 billion or 5.6% from the same period last year.
• Weekly MBA Mortgage Applications rose +6.9% for the week ending August 2, following the prior week’s -3.9% decline. The Purchase Index was up +0.8% following a -1.5% drop the prior week. The Refinance Index jumped +15.9% after falling -7.2% the prior week. The average 30-Year Mortgage Rate fell to 6.55% from 6.82% the prior week, the lowest level since May 5, 2023.
• Weekly Initial Jobless Claims fell -17,000 to 233,000 for the week ending August 3, below expectations for 240,000. The prior week was revised up to 250,000 from the originally reported 249,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose to 1,877,000 in the week ending July 27, 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 economic calendar picks up after last week’s sparse activity, but earnings season is winding down. Next week’s highlight will be new inflation data. Wholesale inflation for July will be reported with Tuesday’s Producer Price Index (PPI), and Wednesday brings the Consumer Price Index (CPI) for July. Other economic releases next week include the National Federation of Independent Business’ Small Business Optimism Index for July on Tuesday, the Census Bureau’s Retail Sales data for July on Thursday, and the University of Michigan’s Consumer Sentiment Survey for August on Friday. The tail end of the second-quarter earnings season this week features results from Barrick Gold on Monday, Flutter Entertainment and Home Depot on Tuesday, Cisco Systems on Wednesday, as well as Alibaba Group, Applied Materials, Deere, and Walmart all on Thursday.

Did You Know?

AI ANALYSTS – New research shows that Artificial Intelligence (AI), specifically Large Language Models (LLM), predicted whether a company’s earnings would rise or fall in the subsequent year +60.4% of the time versus just +52.7% of the time for human analysts. Don’t count out Wall Street yet, though. The LLM’s accuracy rate dips during times of economic shock, such as the 1974 oil shortage, the 2008 financial crisis, and the Covid-19 pandemic, the paper said. Since the LLM’s predictions are based solely on financial statements, human analysts are more accurate when external factors loom large, the researchers said (Source: The Wall Street Journal).

ANCHOR DROP – The share of anchor spaces at enclosed shopping malls that major department stores occupy is now less than 50%, according to real-estate firm Green Street. Roughly 500 department-store spaces are vacant nationwide, with more closures coming with Macy’s closing 150 underperforming stores over the next three years. Discounters, specialty stores, and online shopping are luring away department stores’ customers (Source: Green Street, The Wall Street Journal).

HEAT-RELATED DEATHS – The number of people in the U.S. who died from heat-related causes topped 2,300 in 2023, the hottest year in recorded history, according to provisional figures. In the 15 years through 2018, it was 700 a year. More states are passing laws banning utilities from unplugging customers during extreme heat. With electricity bills rising, some households can’t pay their bills, driving them to keep air conditioners off in extreme weather (Source: CDC, The Wall Street Journal).

This Week in History

LOW DOW – On August 8, 1896, the Dow Jones Industrial Average, less than three months old, hit the lowest level ever recorded: 28.48, down -30.5% in just ten weeks (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.