AUGUST 2024 MARKET UPDATE
Narrative shift, rate cut likely
Hoping this update finds you doing well!
After a strong June, major U.S. equity indexes were mixed in July, indicating some divergence and a potential shift in the narrative to come. And so far, in limited trading sessions, August is showing a different tone. This change in tone is focused on a cooling economy, which has been the Fed’s plan all along by raising rates. However, nerves exist that a soft landing (cooling the economy without a recession) is no longer as likely. Investors anxiously received mixed corporate earnings. In fact, earnings contributed to some selling in equities, especially megacap tech, towards the end of the month and into the first two trading sessions in August. All the while, value stocks and small-caps (companies with smaller market capitalizations) fared quite well in July.
Overall, here was the tale of the tape for the month of July:
The S&P 500 increased by 1.13%, the Nasdaq 100 fell by 1.50%, and the Dow Jones Industrial Average rose by 4.41%. Divergence Featured in July For an extended period of time, the market narrative has been centered around AI and megacap tech, with names like NVIDIA and META powering major market indexes higher. Well, narratives do change in the financial markets; the shift towards higher dividend-paying blue-chip value stocks and even underloved small-caps came into play as July progressed. But there was nowhere to hide once August got moving, with selling coming in across the board. More on that in a minute!
Be Diversified
Early August developments reinforced why a diversified portfolio — having an equity and fixed income portfolio properly constructed based on risk tolerance and other factors — is a must. And while we all know that bonds are not nearly as trendy as a NVIDIA that split 10:1 back in June, it is prudence that makes the bacon for long-term investors. Markets do not go up or down in a straight line, and diversification helps long-term investors weather storms.
Earnings Interpretations
It’s a busy earnings season, and there has been no shortage of earnings and overall market volatility as of late. Many companies have shown mixed earnings, with some corporations missing the mark on top-line and bottom-line results. Technology stocks were sold heavily at the end of July and into the very beginning of August. We are beyond the halfway point in the earnings season now, and we will see what the rest of it brings, with many tech giant earnings out of the way.
Inflation Cooling
So, here is the good news: Inflation is cooling. The recent data will factor into the Fed’s September policy meeting, where traders currently see a 100% chance of a rate cut — a 25.5% chance of a 25 basis point cut and a 74.5% chance of a 50 basis point cut.
Consumer Price Index (CPI): June consumer pricing, released in July, actually fell on a monthly basis, with monthly CPI data showing a 0.1% monthly decrease from May. This was two ticks lower than the Dow Jones estimate for a 0.1% monthly increase. Great news for the interest rate cut case! Year-over-year, data showed a 3.0% increase — the lowest level in more than three years. A 3.8% slide in gasoline pricing helped to tame the inflation reading, and even more good news was evident, as shelter and food costs were only 0.2% higher from a month ago. While still sticky, shelter inflation had the lowest monthly jump in three years, encouraging interest rate-cutting hopeful bulls.
Producer Price Index (PPI): After the soft CPI print, we got the June Producer Price Index (PPI), which ran hotter than estimates. Data showed wholesale pricing rose 0.2% in June, higher than the 0.1% Dow Jones estimate. Looking at yearly data, wholesale data for June increased by 2.6%. So, while consumer pricing was lower, the wholesale pricing data was a bit warm — no inflation celebrations just yet! Services pricing contributed to the rise in overall producer pricing, showing a 0.6% monthly gain that accounted for around three-quarters of the overall wholesale pricing gain.
July Fed Meeting
On the last day of July, the Federal Reserve (Fed) left rates unchanged as expected, keeping the federal funds rate at 5.25% – 5.50%. The Fed statement included this note, “Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee’s 2 percent inflation objective.”
Market Reaction
The Fed decision day stimulated investors to bid equities higher as optimism grew surrounding rate cuts to come. Earnings from Meta after the bell on the same day helped to keep a bid under major stock indexes. However, the buying enthusiasm was short-lived, as August began the next day. It was a volatile week on Wall Street, with the Fed in the rearview mirror and investors reacting to the next morning’s unemployment data, showing the highest level since October 2021.
Labor Market
On the note of softer economic data, let’s dig into the July labor market data release. The month’s labor market data missed the mark in a big way, triggering selling across major stock indexes and lower Treasury yields. Overall, 114,000 jobs were created versus Dow Jones estimates for 185,000. This result was a big miss, especially given the earnings anxiety investors were coping with heading into the jobs number. However, it did cement the odds for a rate cut to come — this is what the market wanted for so long, anyway! Moving forward, we’ll see how the market further digests the weaker employment data.
Putting It Together
Market narratives can change on a dime. July showed divergence in major stock indexes, with investor appetite shifting towards value stocks and underloved small-caps versus megacap tech, which could be interpreted as a shift in narrative and sentiment. Economic data is also showing signs of slowing, which is exactly what the Fed has wanted to see to deliver beloved rate cuts. But now that we have the signs of such cooling, volatility has returned as selling accelerated in the first two trading sessions in August. What To Do? With heavy selling to start August, it’s important to remember that volatility is always going to present itself in these markets. Remembering the long-term plan when volatility spikes is essential. Nobody knows how long this new narrative will last, but a diversified portfolio is a helpful way for long-term investors to weather volatility storms.
With that overview noted, as more developments occur, we will keep you apprised of them. As always, if you would like to discuss the current market outlook or explore investment strategies based on your objectives, please feel free to contact me. I am here as a resource for you.
Financial Advisor
HH Financial Planning Group
Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer member FINRA/SIPC. HH Financial Planning Group and Cambridge are separate entities. CONFIDENTIALITY NOTICE: This message is intended for the use of the individual or entity to whom it is addressed. The information in this message is confidential. Access to this message by anyone else is unauthorized. If you are not the intended recipient, any disclosure, copying, distribution or any action taken, or omitted to be taken in reliance on it is prohibited and may be unlawful. If you have received this communication or message in error, please notify us immediately. Content was prepared by Levitate. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. We cannot accept trade orders through email. Important letters, email, or fax messages should be confirmed by calling (608) 935-7800 or (844) 544-1374. This email service may not be monitored every day or after normal business hours. The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The Russel 2000 Index is a stock market index that measures the performance of the 2,000 smaler companies included in the Russel 3000 Index. Citations: Adinolfi, J. (2024, July). Small-caps and value stocks dominated in July by the widest margin in decades. Can the ‘great rotation’ continue? Retrieved from https://www.morningstar.com/news/marketwatch/20240731357/small-caps-and-value-stocks-dominated-in-july-by-the-widest-margin-in-decades-can-the-great-rotation-continue Board of Governors of the Federal Reserve System. (2024, July). Federal Reserve issues FOMC statement. Retrieved from https://www.federalreserve.gov/newsevents/pressreleases/monetary20240731a.htm#:~:text=Recent%20indicators%20suggest,percent%20inflation%20objective. Butters, J. (2024, August). Earnings Insight. Retrieved from https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_080224A.pdf CME FedWatch Tool. (2024, August). CME FedWatch Tool. Retrieved from https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html Cox, J. (2024, July). Inflation falls 0.1% in June from prior month, helping case for lower rates. Retrieved from https://www.cnbc.com/2024/07/11/cpi-inflation-report-june-2024.html Cox, J. (2024, August). Job growth totals 114,000 in July, much less than expected, as unemployment rate rises to 4.3%. Retrieved from https://www.cnbc.com/2024/08/02/job-growth-totals-114000-in-july-much-less-than-expected-as unemployment-rate-rises-to-4point3percent.html Dow Jones. (2024, July). DJIA Rises 4.41% This Month to 40842.79 — Data Talk. Retrieved from https://www.morningstar.com/news/dow jones/2024073115912/djia-rises-441-this-month-to-4084279-d Ata-talk Hansen, S. (2024, July). The Economy Is Cooling, and That’s Good News. Retrieved from https://www.morningstar.com/economy/economy-is-cooling-thats-good-news Hoorelbeke, K. (2024, July). Market on edge: Volatility in action: VIX, Microsoft and Meta earnings. Retrieved from https://www.home.saxo/content/articles/equities/market-on-edge—volatility-in-action—vix—microsoft—meta-31072024 Jennewine, D. (2024, June). Nvidia’s 10-for-1 Stock Split Comes With a Warning. History Says the Artificial Intelligence (AI) Stock Could Do This Next. Retrieved from https://www.nasdaq.com/articles/nvidias-10-1-stock-split-comes-warning-history-says-artificial-intelligence-ai-stock could Kaplan, J., Hoff, M. & Sheffey, A. (2024, August). The economy’s soft landing is suddenly in question. Retrieved from https://www.businessinsider.com/jobs-unemployment-interest-rates economy-recession-soft-landing-2024-8 Market Intelligence Desk Team. (2024, August). July 2024 Review and Outlook. Retrieved from https://www.nasdaq.com/articles/july-2024-review-and outlook#:~:text=The%20Nasdaq%2D100%20In dex%2C%20which,%25%20and%2013.5%25%2C%20respectively. Mish. (2024, July). Producer Price Index Hotter than Expected, Led by Services. Retrieved from https://mishtalk.com/economics/producer-price-index-hotter-than-expected-led-by services/#:~:text=Prices%20for%20final%20demand%20transportation%20and%20warehousing%20services%20fell%200.4%20percent. Nash, J. (2024, June). Moving Averages: S&P Finishes July 2024 Up 1.1%. Retrieved from https://www.advisorperspectives.com/dshort/updates/2024/07/31/moving-averages-s-p-finishes-july-20 24-up-1-1#:~:text=12%2Dmonth%20SMA. ,This%20is%20up%20from%20last%20month’s%20final%2 0no%20%E2%80%9Ccash%E2%80%9D%20signal,back%20in%20at%20the%20bottom. NJIABA.org. (2024, July). Inflation Rate Slowed to 3% in June as Gasoline Prices Fall. Retrieved from https://njbia.org/inflation-rate-slowed-to-3-in-june-as-gas-prices-fall/#:~:text=The%20index%20 for%20 gasoline%20 fell%203.8%25%20in%20June%2C%20after%20declining%203.6%25%20in%20 May%2C%20more%20than%20 offsetting%20a%200.2%25%20 increase%20in%20shelter%20for%20the%20month%20of%20 June.%C2%A0 Pound, J. (2024, July). ECONOMY Wholesale prices rose 0.2% in June, slightly hotter than expected. Retrieved from https://www.cnbc.com/2024/07/12/wholesale-prices-rose-0point2percent-in-june-slightly-hotter-than expected.html#:~:text=The%20producer%20price%20index%20climbed%200.2%25%20last%20month%2C%20the%20Labor%20Department%E2%80%99s%20Bureau%20of%20Labor%20Statistics%20reported% Reuters. (2024, August). Fed seen cutting rates by half a point in Sept, after weak jobs data. Retrieved from https://www.reuters.com/markets/us/fed-seen-cutting-rates-by-half-point-sept-after-weak jobs-data-2024-08-02/ Vanian, J. (2024, July). Meta shares pop on revenue and earnings beat, better-than-expected forecast. Retrieved from https://www.cnbc.com/2024/07/31/meta-earnings-q2 2024.htm