- Stocks finish higher: Equity markets closed higher on Monday as stocks rebounded following a risk-off week. The S&P 500 declined by more than 4% last week as softer-than-expected labor market data raised economic growth concerns. Markets recovered some of last weeks losses today with the S&P 500 and Dow both gaining over 1%.* From a leadership standpoint, most sectors of the S&P 500 finished higher with the industrials, financials and consumer discretionary sectors among the top performers.* Overseas, Asian markets were mostly lower overnight while European markets finished the day higher with markets focused on Thursday's European Central Bank interest-rate decision. Treasury yields were little changed on the day with the 10-year yield ticking down to around 3.7% while the 2-year yield ticked up to 3.68%.* In the commodity space, oil prices rebounded, rising to about $69 per barrel after declining by over 7% last week.* Looking ahead, inflation will be in focus for markets with the release of consumer price index (CPI) inflation on Wednesday.
- Softening labor market led to a risk-off move in markets last week – The S&P 500 declined by more than 4% last week, marking the largest weekly decline in more than a year.* Softer-than-expected labor-market data was a primary culprit behind last weeks move lower, with Friday's nonfarm payrolls report the highlight of the week. Friday's report showed that nonfarm payrolls rose by 142,000, below expectations for a gain of 160,000 and below the prior twelve-month average of 202,000.* Additionally, nonfarm payroll growth for June and July were both revised lower in Friday's report by a cumulative 86,000 jobs.* The silver lining to Friday's report was that the unemployment rate ticked lower in August to 4.2% versus 4.3% in July.* In our view, last weeks data points to a labor market that is clearly cooling but not collapsing. While perhaps less of a tailwind to consumer spending as in recent months, we believe labor-market conditions remain broadly supportive to household consumption.
- September has historically been a weak month for stock performance: While over the long-run, we believe it is the economic backdrop and fundamentals that drive stock performance, not the calendar, it is worth acknowledging that September has historically been a weak month for stock returns. Since 1970 the S&P 500 has declined by about 0.7% on average in September, with returns positive only 50% of the time.** This compares with an average return of roughly 1% for all months with returns positive 64% of the time.** Encouragingly, despite September being a historically weak month for stock performance, the fourth-quarter of the year has been particularly strong, with returns positive roughly 75% of the time since 1970 in both November and December.** While there's no guarantee history will repeat itself this year, entering a period of favorable seasonality combined with a healthy economic backdrop should offer long-term investors confidence in the months ahead. We'd recommend investors use pockets of weakness to add to quality investments in-line with their long-term goals.
Brock Weimer, CFA
Associate Analyst
Source: *FactSet **Morningstar Direct, S&P 500 Total Return Index, and Edward Jones
- Stocks close lower on growth concerns – Nasdaq and the Magnificent 7 stocks led stocks lower on Friday after the mixed jobs report triggered concerns that the Fed is behind the curve in cutting rates*. The Nasdaq is again in correction territory but remains above its low in early August as economic data released since then still point to an ongoing expansion. All sectors were lower on the day, with communication services and consumer discretionary stocks leading to the downside*. In global markets, Asia and Europe also closed lower. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil declined, reaching a new low for the year, and gold also traded lower.
- Employment report shows slower job growth – Total nonfarm payrolls grew by 142,000 in August, below estimates for 160,000* and the average monthly gain of 202,000 over the past 12 months**. Job gains for June and July were also revised lower by 86,000**. Despite slower job growth, the unemployment rate ticked down to 4.2%, in line with estimates, following the unexpected increase last month. Hourly earnings were up 3.8% annualized, above expectations for a 3.7% rise*. In a positive sign, weekly jobless claims remain low, indicating that employers are primarily pulling back on hiring rather than turning to significant layoffs. As we had been expecting, the labor market and broader economy continue to cool, but recent data don't reflect sudden deterioration that would be consistent with a recession, in our view.
- Bond yields edge lower - Bond yields were down, with the 10-year Treasury yield at about 3.72%, driving bond prices higher, helping balanced portfolios offset some of today's equity volatility. With the 2-year Treasury yield at 3.66%, the term spread versus the 10-year Treasury, also known as the yield curve, has returned to positive territory in recent days, following more than two years of inversion. The Federal Reserve (Fed) has announced its intention to start cutting interest rates later this month. Bond markets are pricing in expectations for 2.5% of Fed rate cuts over the next 12 months, which would bring the Fed Funds rate below 3%***. As inflation has moderated, the Fed's focus is turning to its other mandate - maximum employment – as the labor market cools. We believe the Fed remains on track to start a rate-cutting cycle that will likely continue for several meetings. While a 50 basis point (0.5%) cut later this month is a possibility, a 25 basis point (0.25%) cut still appears more likely, in our view. Lower interest rates should help reduce borrowing costs for businesses and consumers, which would be positive for economic growth and corporate profits.
Brian Therien, CFA
Investment Strategy
Source: *FactSet **U.S. Bureau of Labor Statistics ***CME FedWatch
- Stocks struggle to gain traction ahead of key jobs report - Following a two-day pullback to start the holiday-shortened week, equity markets attempted to stabilize today but failed to post gains. Mixed readings on the labor market drove short- and long-term government bond yields to their lowest this year ahead of the highly anticipated U.S. payrolls report*. Tech, which has been the source of weakness this week, rebounded with help from the Magnificent 7 group of stocks. Elsewhere, WTI oil prices declined modestly after falling below $70 a barrel yesterday for the first time since December of 2023*.
- Labor market shows further signs of cooling, but no sudden deterioration - The state of the labor market is front and center this week with all eyes on the payrolls report on Friday. Ongoing job gains and low unemployment have been critical pillars of support of this expansion, more than offsetting the headwinds of high interest rates and inflation. However, more recently, there have been increasing signs that labor market conditions are softening. Job openings fell in July below eight million, pushing the ratio of job openings to unemployed workers to the lowest in more than three years and slightly below the pre-pandemic level*. Also, today's released private payrolls report by ADP showed that U.S. companies added the fewest jobs since the start of 2021*. However, for now we would describe this cooling as a process of normalization after a period of outsized strength. Weekly jobless claims remain low, indicating that a slowdown in hiring and an increase in supply of workers are the reasons for the rise in unemployment rather than higher layoffs. Corporate profits are on the rise and unit labor costs have declined helped by an uptick in productivity, lessening the need for companies to seek ways to cut costs by adjusting their headcount. Tomorrow's jobs reports will no doubt help shape the narrative around the state of the labor market. Expectations are for the unemployment rate to tick down and the economy to add 165,000 jobs*.
- Rates cuts ahead, debate now on size and speed - In addition to proving clues for economic growth, tomorrow's employment report will be a key input in helping Fed officials determine whether a quarter- or half a percentage-point hike is warranted when they announce their rate decision on September 18. With inflation making further progress toward the 2% target and becoming less of a concern, policymakers have become more sensitive to achieving the second part of their dual mandate, which is maximum employment. As a result, more of the debate now is about how fast and how far instead of the direction of travel for Fed policy. While the Fed has a long history of policy mistakes, this time it’s about to embark on a multiyear rate-cutting cycle while growth remains resilient (though slowing), credit conditions are easing, and the labor market is still adding jobs. This suggests to us that a soft landing remains the most likely outcome. Rate cuts are not a panacea, but the gradual easing in borrowing costs should help support consumer and business spending. From a market perspective, the start of a new rate-cutting cycle is typically positive for stocks as long as the economy avoids a recession.
Angelo Kourkafas, CFA
Investment Strategist
Source: *FactSet.
- Stocks close modestly lower after Tuesday's sell-off: After a sharp sell-off on Tuesday, with the S&P 500 falling over 2%, stock markets fell modestly on Wednesday. This comes after news broke that chipmaker NVIDIA received a subpoena from the Department of Justice as part of antitrust investigations. While the investigations are still in early phases, according to industry estimates, NVIDIA does control more than 80% of the market for data-center artificial intelligence (AI) chips*. More broadly, after an 18% run in the S&P 500 this year through the end of August*, investors may be more cautious as we head into a seasonally weaker September and October period, followed by election season in November. Some of the winners of the past year, including the technology and communication services sectors, have seen the largest pullbacks, both down over 5% this quarter thus far*. In our view, while we may see volatility in the weeks ahead, the fundamental underpinnings of the bull market remain intact: inflation seems to be easing, the Fed remains poised to cut rates, and the economy, while cooling, does not appear to be falling into imminent recession.*
- All eyes on the U.S. labor market this Friday: Perhaps one of the largest near-term drivers of stock market sentiment will be the outlook for the U.S. labor market. After last month's nonfarm-jobs report, when the U.S. unemployment rate jumped from 4.0% to its highs of the year of 4.3%*, markets were spooked that the economy may be heading toward an imminent recession. However, since then we have seen a slew of better economic data, including strong retail sales, a second-quarter GDP growth figure revised upwards to 3.0% annualized, and easing inflation data*. Now investors will likely shift their attention to the August nonfarm-jobs report, out on Friday morning. Forecasts call for the unemployment rate to improve from 4.3% to 4.2%, while jobs added are expected to tick higher, to 165,000 from 114,000*. If the labor market data is in line with estimates, markets, in our view, would likely breathe a sigh of relief, as this would be another confirmation that the labor market is still holding up well. While the labor market has softened in recent months, we believe this is a normalization from a period of outsized strength post-pandemic, rather than a severe downturn in demand for labor.*
- First rate cut likely on September 18: Perhaps after the labor-market data, investors will be most keen to hear from the Federal Reserve, which is set to meet on September 17 and 18. The Fed will provide markets not only with an updated interest-rate decision, but also a new set of economic forecasts and its highly anticipated "dot plot," which outlines the expected path of interest rates by the FOMC members. In our view, the Fed will likely cut interest rates at this September meeting, bringing the fed funds rate from 5.25% - 5.5% to 5.0% - 5.25%. We believe Fed Chair Jerome Powell will continue to focus on both sides of the Fed's dual mandate: inflation and the labor market. Personal consumption expenditure (PCE) inflation has already fallen below the Fed's 2.6% target for 2024, while the unemployment rate has also risen above the Fed's 4.0% expectation this year*. Thus, we believe both sides of the dual mandate now point clearly toward a path of easing monetary policy. In our view, the Fed will likely bring interest rates lower at a gradual pace through 2025, providing some support for households and lowering borrowing costs for both consumers and corporations. Historically, when the Fed is easing and the economy is not falling into imminent recession, stock markets tend to perform well in this backdrop.
Mona Mahajan
Investment Strategy
Source: *FactSet.