Weekly Market Commentary

THE WEEK IN REVIEW: July 28 – August 3, 2024

Markets drop amid recession worries, Fed rate decision and global pullback

It’s somewhat of an understatement to say last week was a rough one for markets. The slide started midweek, when the Federal Reserve decided to keep rates where they are for now (more below). In addition, the ADP employment report released the same day wasn’t encouraging as we came in well under expectations (122,000 actual vs. 154,000 expected).

Then we got a weaker-than-expected ISM Manufacturing Index reading for July on Thursday; expectations were for a 48.8 reading, which already signals a contraction. (Levels higher than 50 signal expansion, while levels below 50 signal contraction.) The reading was even worse than expected at 46.8. This was bad news, and talk began to shift from soft landings to legitimate concerns about a slowing economy.

After the manufacturing number on Thursday sent markets downward, the BLS July employment situation on Friday pushed markets downward even further. The reading was spectacularly bad, coming in at +114,000 when consensus was calling for +175,000 new jobs. And the unemployment rate climbed to 4.3%, when just three months ago it was below 4%.

Tensions in the Middle East, ongoing political developments and the potential mess from Hurricane Debby all added to the markets’ negative mood. That mood lingered over the weekend and into Monday morning, especially after investors woke to find the Japan stock market had a sell-off overnight, experiencing its worst drop since 1987. Concerns mounted as Warren Buffett’s Berkshire Hathaway began dumping stocks. As a result, the Dow fell more than 2.5% by midday Monday. Volatility has also spiked, rising to over 40 from 13 in mid-July.

A lot of this market angst may be driven more by sentiment than facts. Yes, unemployment has gone up and the economy appears to be slowing — but we are far from recession. The fear seems to be that negative sentiment will take over and start to drive reality. Markets appear worried about earnings, but that can be remedied by the Fed cutting rates sooner rather than later and by waiting for the data to confirm inflation is under control.

However, we know market drops like these can be concerning, especially after we’ve had a relatively long period of growth. But it’s important to remember that corrections are a normal part of investing — and they can also provide new investing opportunities. We’ve also taken steps to “weatherproof” your portfolio against market drops such as this one.

That said, the last thing investors want to do when markets drop is make investing decisions based on fear. Instead, you’ll want to be positioned to take advantage of an upward swing when markets come back up. Please reach out to our office if you have questions about the latest market events and how they might be affecting your portfolio.

The Fed signals September cut

There was no July rate cut forthcoming at last week’s Federal Reserve meeting, but there were plenty of strong indications that a September rate cut is in the offing. Once again, the language of expectations was hedged with the appropriate disclaimers of data cooperating and nothing new occurring to disturb the current economic landscape for the Fed to cut rates.

However, in the statement announcing its decision to do nothing, the central bank changed the language of prior statements about being “highly attentive to inflation risks” to now being “attentive to the risks to both sides of its dual mandate,” referring to fighting inflation and promoting employment. Aside from slowing yet still stubborn inflation, the Fed for the first time acknowledged the unemployment rate has “moved up,” though it “remains low.” At his post-meeting press conference, Fed Chair Jerome Powell also told reporters: “A reduction in the policy rate could be on the table as soon as the next meeting in September.”

We talked about the “best-laid plans of mice and men” a few months ago and how it seems just plain silly to expect things to follow our preferred path while ignoring other possibilities and potential risks. That said, it might seem like a mistake for the Fed not to have cut 25 basis points (0.25%) in July. The difference between a Fed Funds rate of 5.25% and 5% isn’t material — but it might have shown a commitment to lowering rates and provided a clear direction for the markets.

For now, it’s enough to say that August has started in a pretty turbulent manner. August — along with September and October — tends to be pretty volatile for markets historically, and the feeling is the Fed may have missed an opportunity to provide some comfort and direction to the markets. There is such a thing as being too careful; right now, the Fed is being too careful. If it persists in staying on this path, inflation may be tamed, but it could be at the expense of driving us into recession.

Coming This Week

• Nothing significant from a data standpoint is scheduled for Monday or Tuesday, except for the U.S. trade deficit.
• We’ll see the latest on consumer credit and MBA mortgage applications on Wednesday.
• Weekly jobless claims and wholesale inventories will be released on Thursday. We’ll also hear from Richmond, Virginia, Fed President Tom Barkin.
• Markets will spend most of the week digesting the Fed meeting and the future of interest rate cuts. We’re also in the midst of second-quarter earnings, so a surprise here or there may have an impact on the market. Some notable names reporting this week include Uber, Lyft, Caterpillar and CVS.
• Second-quarter earnings have been decent so far. With 41% of the S&P 500 reporting as of July 26, 78% of companies have reported a positive earnings per share (EPS), and 60% reported positive revenue. Earnings growth for the S&P 500 in the second quarter is 9.8% so far, the highest since the fourth quarter of 2021.

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