Market Update: August 5, 2024
Economic data for the week included the U.S. Federal Reserve keeping key interest rates steady, as expected. On the positive side, pending home sales rose, while negative data included ISM manufacturing, construction spending, and jobless claims. The monthly employment situation report for July disappointed, with fewer jobs and a higher unemployment rate.
Equities fell back globally, with economic and policy concerns outweighing decent U.S. corporate earnings reports. Bonds fared quite well as interest rates plummeted across the curve. Commodities lost ground for the most part, due to demand concerns, with the exception of precious metals.
In what some have called one of the more important weeks of the year thus far, the U.S stock market did not disappoint in terms of volatility. While a Wed. rally came along with Fed hints toward a September start to interest rate cuts, by Thu., weaker economic growth, including manufacturing ISM and jobless claims, as well as the employment report on Fri., which reversed that exuberance in a downward direction, raising some concerns the Fed has waited too long to ease and/or that their language about a Sept. cut wasn’t quite convincing enough. Non-committal language has often been the hallmark of the Fed, as it’s been more focused on keeping itself flexible in response to changing conditions; however, weakening in a few areas certainly does raise the odds for a Sep. cut, as well as potentially for cuts in Nov. and Dec. as well, as needed. In fact, after the weak July jobs report, odds have risen for a -0.50% cut by Sep. (possibly assuming a cut made in-between meetings, which the Fed can do, at the risk of raising market anxiety even further), to a year-end rate of 4.00-4.25% (implying five cuts in total). In addition, some polls have shown a slide in former President Trump’s odds versus Vice President Harris, which has caused an unwind for stocks tied to benefits of a pro-business and looser regulatory regime.
By sector, only the traditional defensives of utilities, health care, and consumer staples ended the week with gains, while declines were focused in technology and energy, each down -4%. Real estate also fared positively, up over 4%, as interest rates declined. Value lagged slightly less than growth, while small cap fell back relative to large cap.
Earnings continue to roll in, with last week’s reports representing 40% of the S&P’s market cap, and a particularly heavy one for big tech—ending mixed. Per FactSet, 75% of S&P 500 companies have now reported for Q2, with 78% having beaten earnings estimates, and 59% beating revenue estimates, now raising the blended earnings growth rate to 11.5%, up nearly 3% from initial estimates a few weeks ago. Despite signs of potential downturn in the economy, analysts have not been lowering earnings estimates for Q3 broadly, which are now over 6% for the index. However, there appear to be some concerns over downbeat descriptions of slowing U.S. consumer behavior.
Considering this year’s excitement around artificial intelligence, investors have appeared to become particularly more sensitive to management comments sounding spending on AI, as well as potential uses and payback periods. Of course, much of that is unknowable at this point, but skeptical investors are looking for signs of AI spending going into a ‘black hole,’ with fewer-than-expected revenue benefits in the near-term. Some companies have also hinted at weaker consumer spending in some areas, which has been closely noted by markets due to that being a key anchor of recent strong economic growth. Microsoft specifically mentioned “constrained” AI capacity and indications that such investments could take over a decade to monetize, while Amazon and Meta also noted high and growing capital expenditures related to cloud AI this year.
Foreign stocks declined to a similar degree as domestic, although a drop of about a percent in the U.S. dollar provided a tailwind of over a percent. U.K. and emerging market equities declined only slightly, offset by larger declines in Europe and Japan—several of which were driven by monetary policy changes and expectations. The Bank of England cut rates by -0.25% to 5.00%, in their first ease since the pandemic (however, the vote was five to four, with dissents far more common there). However, they noted a very slow easing pace was likely, similar to the ECB. The Bank of Japan, on the other hand, raised policy rates from 0.00-0.10% to 0.25%, the highest level in over 15 years, as well as plans to reduce quantitative easing bond purchases by half. This continues to bring a sense of more normalcy to rate conditions there, even if it means moving in the opposite direction compared to other major central banks.
Bonds fared well as interest rates fell back sharply across the yield curve as economic data deteriorated, and signs pointed to a Fed rate cut sooner than later following the July meeting. U.S. Treasuries outperformed corporates, with investment-grade credit outperforming high yield and floating rate bank loans, each of which fell back slightly on the week. Foreign bonds were propelled higher by the decline in the dollar.
Commodity indexes declined as a whole, with the exception of precious metals, which fared well amidst fears of economic weakness. Crude oil fell nearly -5% last week to under $74/barrel. While prices rose following Israel’s military actions against Hamas and Hezbollah commanders, as well as disputed elections in large producer Venezuela, OPEC+ production discussion and economic concerns later in the week pulled down expectations for potential demand.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.