August Market Commentary Too Late, Again?
Published August 9, 2024

THE ONE MINUTE TAKEAWAY

The U.S. economy's resilience is being questioned after a dismal labor report showed non-farm payrolls increasing by only 114,000 jobs in July—far below expectations. The VIX index, which measures stock market volatility, spiked to levels last seen during the onset of the COVID-19 pandemic, signaling heightened investor anxiety. Despite this, there are mixed signals about whether the economy is truly slipping into a recession. While the Sahm Recession Indicator suggests elevated risk, consumer spending and personal income growth remain robust, indicating that the economy might not be in as much trouble as some fear. As the Federal Reserve prepares for its next move, all eyes are on Chairman Jerome Powell and whether he will opt for a rate cut in September. The debate is whether it will be a modest 25 basis points or a more aggressive 50 basis points. Meanwhile, the bond market's reaction—falling yields—has already begun to ease mortgage rates, potentially giving the housing market a needed boost. Investors should brace for continued volatility but also remember that a well-diversified portfolio and a steady hand in turbulent times can be crucial to long-term financial success.
August Market Commentary

Too Late, Again?

July Recap and August Outlook

After weeks of Olympic-themed press reports about the Fed “sticking the (soft) landing” and safely guiding the economy to a place where inflation is coming down and growth is holding off recession, one very bad labor report flipped the script. The threat of recession is not just in the future, it may be here now, according to some reports.  The VIX index, a measure of stock market volatility, spiked above 50 on the first market day after the non-farm payroll numbers came out, a level last seen in March of 2020.

Did Powell wait too long to begin cutting rates? Is a recession inevitable? What is the Sahm rule? There are a lot of points of view on the topic.

Let’s get into the data[1]:

  • Non-farm payrolls increased by 114,000 jobs in July. The Labor Department’s Bureau of Labor Statistics report was below consensus expectations by almost 60,000 jobs.
  • Household debt in 2Q rose to $17.8 trillion. Mortgage, auto, credit cards and HELOC balances all increased. However, aggregate delinquency rates remained unchanged from last quarter, according to new data from the Federal Reserve Bank of New York.
  • Mortgage rates fell to the lowest since May 2023. After remaining near 8% for some time, mortgage rates fell to just over 6% in the first week of August, as bond yields sank.
  • A key services index rose 2.6 percentage points in July. The Institute for Supply Management services index rose above 50% to 51.4%, indicating that the sector is expanding.

What Does the Data Add Up To?

According to the St Louis Fed, the Sahm Recession Indicator signals the start of a recession when the three-month moving average of the unemployment rises by at least 0.50 percentage points above the three-month averages from the previous 12 months. This happened when the unemployment rate hit 4.3% in July. The rule is named for Claudia Sahm, who developed it when she worked at the Fed.

However, even though the indicator is flashing red, Claudia Sahm cautioned that it doesn’t mean we are in recession, just that the risk is elevated. She pointed out that the data the National Bureau of Economic Research (NBER) uses to make a recession call is actually solid. Consumer spending rose 2.6% at an annual rate for the second quarter, and even though July’s payroll was low, the average over the last three months was a reasonable 170,000. In addition, real person income growth has been positive in six of the last eight months, Consumer spending is rising as inflation has trended down to more normal levels. Spending increased 0.6% in the second quarter, compared to the 0.2% from the same quarter in 2023.

As a reminder, the National Bureau of Economic Research (NBER) defines a recession as a “significant decline in economic activity that is spread across the economy and lasts more than a few months.

How will Powell likely respond?

At the Federal Open Market Committee Meeting (FOMC) in July, several of the Fed Governors voted for an immediate rate cut. While they are looking particularly astute now, Powell has long played a very measured, well-signaled game. The rate cut in September is the expectation, but the open question is whether it will be the standard quarter percentage rate cut (.25, or 25 basis points) or if the Fed will react by enacting a 50 basis point cut for the first step in loosening monetary policy in more than two years.

One knock-on effect of the stock market drop was that the risk-off stance pushed money into bonds, ratcheting up bond prices and dropping yields dramatically, as bond prices move inversely to yields. This is helping Powell to achieve his aim of lower rates. Lower mortgage rates may jump-start the housing market.

Chart of the Month: The VIX Briefly Sounds an Alarm

The VIX spiked on Monday, but quickly quieted down. The VIX is the Chicago Board of Trade Volatility Index, and it measures the stock market’s expectation of volatility ahead.

Source: CBOE 

Equity Markets in July

  • The S&P 500 was up 1.13% for the month
  • The Dow Jones Industrial Average rose 4.41% in June
  • The S&P MidCap 400 returned 5.73% for the month
  • The S&P SmallCap 600 rose 10.71%

Source: S&P Global. All performance as of July 31, 2024

Earnings season is well underway, with 308 issues reporting so far, representing 57.6% of the market value. Of these, 242 (78.6%) beat expectations on earnings and 187 of 305 (61.3%) beat expectations on sales. The month saw a trend of outflows from large cap stocks into small caps, with the expectation that smaller stocks would benefit more from rate cuts.[2]

Bond Markets in July

The 10-year U.S. Treasury ended the month at a yield of 4.04%, down from 4.39% the prior month. The 30-year U.S. Treasury ended July at 4.31%, down from 4.55%. The Bloomberg U.S. Aggregate Bond Index returned 1.94%. The Bloomberg Municipal Bond Index returned 0.91%. [3]

The Smart Investor

Planning for volatility is part of a good asset allocation strategy. Ensuring portfolio diversification can help mitigate the risk of downturns. But that’s only part of the story. Investor behavior in the face of market volatility can have a bigger impact than the ups and downs of the market. Do you stay invested and ride out market storms calmly, or is your instinct to cut losses and sit on the sidelines until it’s over?

Knowing your own comfort with risk is the first step in establishing a risk/return profile that will help you meet your long-term goals while letting you sleep at night.

Looking at your investments from the perspective of where you are on your financial journey, and what is most important to you can be surprisingly insightful. Talking to a financial advisor about not just what your portfolio is doing, but how you are responding to it is the first step.  We’re always here to help.  

[1]:Source: U.S. Bureau of Labor Statistics, “Total nonfarm payroll employment edged up by 114,000 in July 2024,” BLS (BLS.gov).
Source: Federal Reserve Bank of New York, “Quarterly Report on Household Debt and Credit,” NY Fed (BLS.gov).
Source: Mortgage News Daily, “Mortgage Rates Fall to Lowest Levels Since May 2023,” Mortgage News Daily.
Source: Bloomberg, “ISM Services Index Rises to 51.4% in July, Indicating Expansion,” Bloomberg (BLS.gov).

[2] Investopedia – “How This Week’s Big Tech Earnings Could Affect the Broader Market” / 07/29/2024

[3] 10-Year U.S. Treasury Yield: Ended the month at 4.04%, down from 4.39% the prior month.

30-Year U.S. Treasury Yield: Ended July at 4.31%, down from 4.55%.

Bloomberg U.S. Aggregate Bond Index: Returned 1.94%.

Bloomberg Municipal Bond Index: Returned 0.91%

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