Weekly Market Update – September 6, 2024

Quick Takes

• September has historically been the worst month of the year for equities, and 2024 is living up to that reputation so far. The S&P 500 ended the week down -4.3%, its worst week since March 2023. The Nasdaq fell even more, down -5.8%, while the Russell 2000 fell -5.7%. 
• The Employment Situation report showed further deceleration in the labor market in August with just 142,000 Non-Farm Payrolls added during the month, far short of Wall Street expectations for 165,000. The prior two months were also revised lower.
• With stocks sinking, investors sought safety in bonds. The 10-year U.S. Treasury yield dropped -20 basis points for the week to close at 3.71%, its lowest level since June 2023. The Bloomberg U.S. Aggregate Bond Index was up +1.3% for the week.

Source: Bloomberg. Data as of September 6, 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.

‘Return of the Jitters’ sends stocks down, bonds up

Last week brought renewed fears of an economic slowdown that sparked a selloff in stocks and a flight to safety in bonds. Major equity indices had their worst week in a while as data suggested ongoing weakness in economic activity. With U.S. markets closed on Monday in observance of the Labor Day holiday, the jitters began on Tuesday when manufacturing reports showed the sector was weak again in August, remaining in contraction territory for the fifth straight month and for 21 of the last 22 months. That resulted in the S&P 500 Index starting the holiday-shortened week with a -2.1% decline and the Nasdaq Composite Index with a -3.3% deficit. For the S&P, that was the worst one-day performance since the August 5 Yen carry trade scare and only the third daily loss of more than -2% of the year. Things didn’t improve on Wednesday when the morning release of the Job Openings and Labor Turnover Survey (JOLTS) showed job openings ended July well below economists’ expectations. Then in the afternoon, the Federal Reserve released their latest “Beige Book”, a collection of business anecdotes from the 12 Federal Reserve districts that is published eight times per year. It was the most downbeat in recent memory – particularly with regards to hiring trends. Thursday brought a little relief with weekly unemployment claims that were lower than expected, hitting an 8-week low, plus service sector economic reports, in contrast to Tuesday’s manufacturing reports, showed a tick-up in activity in August and remained in expansion territory. However, the main event of the week was the Friday morning release of the monthly Employment Situation report, which disappointed with just 142,000 new nonfarm payrolls added in August. The Bloomberg survey of economists was expecting 165,000 new jobs, and the shortfall just added to the other evidence pointing to a rapidly slowing labor market. Moreover, the jobs created in July and June were weaker than previously reported, with downward revisions taking away 25,000 and 61,000 jobs from those two months, respectively. 

With a week’s worth of economic data showing the soft landing may be in doubt, the S&P 500 ended the week down -4.3%, its worst week since March 2023. The growth scare left the tech-heavy Nasdaq Composite Index down even more, losing -5.8%, its worst week since January 2022. Small cap stocks struggled, too, with the Russell 2000 Index dropping -5.7%. And the malaise spread beyond the U.S., as developed market international stocks (as measured by the MSCI EAFE Index) fell -2.9. The STOXX Europe 600 Index ended -3.5% lower on their own fears about deteriorating global economic growth. Japan’s stock markets fell hard over the week as semiconductor stocks slumped, and speculation grew that the Bank of Japan will hike rates again. Japan’s Nikkei 225 Index was down -5.8%. Emerging market stocks (the MSCI Emerging Markets Index) fared better but were still down -2.3%. Chinese equities continue to weigh on that index. Weak corporate earnings and economic data there are showing no sign of relief, and the Shanghai Composite Index declined -2.7%.

With stocks around the world dropping, investors looked to bonds for safety. The yield on the benchmark 10-year U.S. Treasury note sank -20 basis points over the four-day week to close at 3.71%, its lowest level since June 2023. The shorter 2-year U.S. Treasury note, which is influenced more by the Fed funds rate, was down -27 basis points to close at 3.65%. With treasury yields sinking, the Bloomberg U.S. Aggregate Bond Index advanced +1.3% for the week, and non-U.S. bonds, as measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were just behind with a gain of +1.2%.

Chart of the Week

The monthly Employment Situation report showed further deceleration in the labor market in August. On Friday the Labor Department reported that U.S. employers added just 142,000 new Non-Farm Payrolls (NFP) during the month, far short of Wall Street expectations for 165,000. That compares to 89,000 in July, which was revised lower from the originally reported 114,000 jobs, and June job gains were lowered sharply to 111,000 from 179,000. Private-sector jobs increased by 118,000 in the month. July private sector jobs were revised down to 74,000 from 97,000, and June was revised down to 97,000 from 136,000. Leisure and Hospitality, Health Care and Social Assistance, as well as Construction led the hiring. The Unemployment Rate slipped back to 4.2% from 4.3% as expected. The unemployment rate had been as low as 3.4% just 15 months ago. Inflation watchers noted that Average Hourly Earnings rose +0.4% for the month, above expectations for a +0.3% rise and up from +0.2% the prior month. Year-over-year, Average Hourly Earnings increased to +3.8% from +3.6%, also above expectations for +3.7%. 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 held steady at 62.7%, as expected. The poor showing in job creation may give the Fed room to cut rates more than the 0.25% markets had been expecting at the September 18 Federal Open Market Committee (FOMC) policy meeting. Following the jobs report, traders priced a 0.50% rate cut at 30% odds, according to the CME FedWatch tool.

Monthly U.S. Job Creation

January 2022 through August 2024

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

Economic Review

• The Institute for Supply Management’s (ISM) Manufacturing PMI edged up 47.2% from an eight month low of 46.8% the month before, short of expectations for a 47.5% reading. The manufacturing PMI has now been stuck in contraction territory for 21 of the last 22 months (levels below 50 indicate contracting economic activity). New business fell, with the key New Orders component sinking to 44.6% from 47.4% the prior month. The Production component fell to 44.8% from 45.9%, its lowest level in more than two years. The Employment component rose to 46.0% from a four-year low of 43.4%. The Prices Paid index, a measure of inflation, inched up +1.1 points to 54.0%. The Institute for Supply Management’s (ISM) Services PMI inched up to 51.5% in August from an unrevised 51.4% the prior month, which is where it was expected to stay. Service-oriented companies, such as restaurants and retailers, employ the majority of Americans. Numbers over 50% indicate economic expansion. The New Orders index improved to 53.0% from 52.4%. The Employment index slipped to 50.2% from 51.1%. The Production index fell to 53.3% from 54.5%. For services inflation, the Prices Paid index inched up to 57.3% from 57.0%. The services side of the economy has held up the U.S. for the past few years, but although it remains in expansion territory, it, too is losing momentum.
• Like the sluggish ISM Manufacturing PMI report, the final reading of the S&P Global U.S. Manufacturing PMI for August slipped to an eight month low of 47.9 from 49.6 the prior month. Paramount in the worsening manufacturing was continued weakness in New Orders, which fell at the sharpest rate in 14 months, particularly export orders which saw the worst decline in a year. The survey’s panel of 800 manufacturers across the U.S. also showed that slower than expected sales are causing warehouses to fill with inventory. In recent months, the survey’s Stocks of Finished Goods index has shown some of the largest inventory gains seen since data were first collected in 2007. Producers are also reducing payroll numbers for the first time this year as well as buying fewer inputs amid concerns about excess capacity. Although this fall in demand for raw materials has taken pressure off supply chains, rising wages and high shipping rates continue to be widely reported as factors pushing up input costs, which are rising at the fastest pace since April of last year. Like the competing ISM report, the S&P Global U.S. Services PMI was in expansion territory in August, rising at the fastest pace since March 2022, up to 55.7 from 55.0 the prior month. Growth in total new business was supported to some extent by a second consecutive monthly rise in New Orders, particularly New Export Orders. The Employment component fell for the first time in three months, but Selling Prices continued to be raised in order to pass on higher Input Costs to customers.
• The July Job Openings Labor Turnover Survey (JOLTS) showed Job Openings fell to their lowest level since January 2021 to 7.673 million from 7.910 million (revised down from 8.184 million). That was below expectations for 8.100 million and 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. Job listings fell in Health Care and Government, two of the leading sectors of hiring over the last year. The ratio of Job Openings to Unemployed Workers ticked down to 1.1 from 1.2 and is down from a peak of 2.0 in 2022, and at the prepandemic level, the Fed wants to see it at. The Number of People Quitting Jobs rose to 3.27 million from 3.21 million the prior month, which is far off the record 4.5 million job quitters reached in late 2021. The Quits Rate edged up to 2.1%, near its lowest level since September 2020 and another sign the labor market remains soft. People tend to quit less often when the economy softens, and jobs become harder to find.
• The Commerce Department reported U.S. Factory Orders rose +5.0% in August, just ahead of expectations for +4.9%, but an improvement from the prior month’s unrevised -0.7%. Factory Orders Ex-Transportation were up +0.4%, an improvement from the prior month’s unrevised +0.1%. Durable Goods Orders for long-lasting items such as televisions, appliances, and transportation equipment rose +9.8%, just shy of expectations for a +9.9%. Durable Goods Orders Excluding Transportation were down -0.2%, in line with expectations and unchanged from the prior month. The important Core Capital Goods Orders (capital goods excluding volatile sectors like transportation and defense), a proxy for business spending, remained at -0.1. Core Capital Goods Shipments, which are factored into GDP, fell -0.3% after falling -0.4% the month before. 
• The Commerce Department reported that Construction Spending posted a third straight decline, falling -0.3% in July, far short of expectations for an increase of +0.1%, and down from the prior month’s flat reading (that was revised up from -0.3%). Over the past year, construction spending is up +6.7%, versus an annual rate of +6.2% the previous month. Total Private Construction was down -0.4% after a rise of +0.3% the month before, and total Public Construction was up +0.1% after a drop of -0.7% the prior month. Private Residential Spending fell -0.4% month-over-month as was private Nonresidential Spending. The report showed that single-family construction fell -1.9% and multifamily construction was unchanged.
• Weekly MBA Mortgage Applications rose +1.6% for the week ending August 30, following the prior week’s +0.5% rise. The Purchase Index increased +3.3% following a +0.9% rise the prior week. The Refinance Index slipped -0.3%, following the prior week’s -0.1% dip. The average 30-Year Mortgage Rate slid to 6.43% from 6.44% the prior week, the fifth straight weekly decline and the lowest level since April 7, 2023.
• Weekly Initial Jobless Claims slipped -5,000 to 227,000 for the week ending August 31, just under expectations for 230,000. The prior week was revised up to 232,000 from the originally reported 231,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +13,000 to 1,838,000 in the week ending August 24, below consensus estimates for 1,867,000. Last week’s reading of 1,868,000 was revised down to 1,860,000.

The Week Ahead

Inflation data dominates the coming week of economic reports. On Wednesday, the Bureau of Labor Statistics releases the Consumer Price Index (CPI) for August, and on Thursday, the Producer Price Index (PPI) is reported. Friday brings Import and Export Prices. Beyond inflation data, other notable reports are Consumer Credit on Monday, the NFIB Small Business Optimism on Tuesday, and Consumer Sentiment on Friday.

Also of note during the week will be the European Central Bank (ECB) rate decision. The ECB is widely expected to lower its interest-rate target on Thursday for the second time this year.

Did You Know?

SEPTEMBER SLUMP – September has historically been the worst month of the year for equities, and 2024 is living up to that reputation so far. The average Russell 1,000 Index member is currently down -3.8% in the first four days of the month. The worst performers have been stocks that were the best performers year to date headed into the month. That group has averaged a much larger -5.9 decline in early September. In other words, 2024’s winners have been September’s biggest losers, continuing a rotation that began in August (Source: Bespoke Investment Group).

AI OUCH – The Bespoke AI Basket fell -4.4 percent last Tuesday, the first day of trading in September. That came up just short of the -4.7% drop on July 24 to mark the basket’s worst single day performance to date. The AI Basket is now in its largest drawdown on record, at about -15% from its July all-time high (Source: Bespoke Investment Group).

FLOOD ZONES – FEMA’s official flood maps show 8 million properties in high-risk flood zones, although research shows the actual number might be much higher. Around one third of the claims for federal flood insurance from 2013 through 2023 came from properties outside the high-risk areas, according to the agency. The vast majority of Americans don’t have separate flood insurance, even though standard home-insurance policies don’t cover that risk. (Source: The Wall Street Journal).

This Week in History

MICROSOFT INTACT – On September 6, 2001, the U.S. Justice Department announced that it would no longer seek to break up Microsoft, instead asking a federal judge to impose limitations on the company’s business practices (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.