Investors sold stocks this past week, expressing their displeasure at the pace of earnings within the technology sector as well as a weakening labor market. The belief is that, once again, the Fed may be behind the curve. Although we don’t believe that is the case, we wouldn’t be surprised if they reduce interest rates by 0.50% rather than the consensus of 0.25% at their regularly scheduled meeting September 17-18. Their decision may be predicated upon the activity in the financial markets as well as the inflation data that is due out this week (Consumer Price Index, Producer Price Index). Nonetheless, at this time our baseline case is for 0.25% cut. We’ll know more next weekend.
One final piece that could very well explain the weakness in the equity markets this past week is the fact that we are now in September, a notoriously bad month for stocks. In fact over the past ninety-five years, the average rate of return in September is a negative 1.30%. Our course of action – don’t chase, be patient. Retain some dry powder where appropriate.
“It’s The Economy…”
NON-FARM PAYROLLS (approximately 80% of the U.S. workforce) rose by 142,000 during July, once again below the consensus estimate of 162,000. Payroll numbers for the prior two months were revised to 89,000 and 118,000 from 114,000 and 179,000 during July and June, for a net loss of 86,000. The three-month average fell to 116,333 far below the 202,000 y/y growth. The Unemployment Rate ticked down to 4.2% during August from 4.3% in July. The Unemployment Rate had gotten as low as 3.4% in April 2023. (Source, U.S. Department of Labor)
The Institute for Supply Management’s Composite Index of Non-Manufacturing (Service) Sector Activity edged up to 51.5% during August from 51.4% in July. Of note were New Orders (53.0% v 52.4%), Employment (50.2% v 51.1%), Backlog of Orders (43.7% v 50.6%) and Business Activity (53.3% v. 54.5%). The Prices Paid Component edged up to 57.3% during August from 57.0% during July. FYI, this service sector represents approximately 75% of domestic economic activity. (Source, Institute for Supply Management)
The U.S. Trade Deficit widened to $78.8 billion during July from $73.0 billion during June. The value of Exports rose 0.49% to $266.6 billion from $265.3 billion while the value of Imports rose 2.10% to $345.4 billion during July from $338.3 billion in June. According to Haver Analytics, “the U.S. goods trade deficit with China widened to $27.2 billion in July from $22.3 billion in June with exports to China plummeting 7.8% m/m while imports from China jumped 11.3% m/m. The goods trade deficit with the European Union widened to $18.4 billion in July from $18.0 billion in June while the deficit with Japan widened to $5.4 billion in July from $4.9 billion in June.” (Source, Bureau of Economic Analysis)
- According to the Federal Home Loan Mortgage Corporation (FreddieMac), “mortgage rates remained flat this week as the markets await the release of the highly anticipated jobs report. Even though rates have come down over the summer, home sales have been lackluster. On the refinance side however, homeowners who bought in recent years are taking advantage of declining mortgage rates in order to lower their monthly payments.” Post jobs report obviously all expect mortgage rates to decline this coming week, providing a tailwind to the broad housing market, to include refinancing and remodeling.
We Found This Interesting
- The so-called “Magnificent 7” (Tesla, Nvidia, Meta Platforms, Apple, Amazon, Google and Microsoft) continued to retrench after an historic run-up over the past eighteen months. All were down this past week with had a tough go of it this Tesla (TSLA) performing the best while Nvidia (NVDA) was the laggard. As noted above, we would let the dust settle a bit on these, only nibbling where appropriate. However, we would certainly not be sellers en masse either as we believe once we enter this choppy period, they will reassert themselves although to a lesser extent than over the past year and one-half as, in our opinion, the market will continue to broaden.
- As reported by MFS in Beyond the News (Source, Fidelity) “While the S&P 500 posted a year-over-year total return of 24.5% at the end of Q2 2024, the average IRA account balance grew 14%, up to $129,200, according to Fidelity’ quarterly Retirement Survey. IRAs with account balances of at least $1 million grew 6% to $398,594.”
- The yield curve, a measure of long-term rates as compared to short-term have been inverted for more than two years, meaning that long-term rates were higher than short-term. However, over the past week they normalized (long-term higher than short-term), historically an indication of a softening economy and future fed interest rate reductions. For borrowers and refinancers, watch closely, be patient and be ready to go.
Upcoming Economic Reports scheduled to be released this week include the following, on Monday, July Wholesale Inventories and August Consumer Credit; on Wednesday, August Consumer Price Index (CPI); on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and the August Producer Price Index (PPI); and, on Friday, August Import and Export Price Index and Preliminary August Consumer Sentiment (University of Michigan).
The Q2 Earnings Season is beginning to wind down. However, there remain reports that may impact market sentiment. These include – Oracle (ORCL), Lovesac (LOVE), Kroger (KR) and Adobe (ADBE).
General Disclosure:“This presentation is not an offer or solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable, but its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. Fagan portfolio characteristics and holdings are subject to change at any time and are based on a representative portfolio. Holdings and portfolio characteristics of individual client portfolios may differ, sometimes significantly, from those shown. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed.
Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”