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 | Weekly Market Update September 9, 2024
| Outlook Fears of an economic slowdown have put pressure on the stock market this week. Many of the key employment metrics (such as hourly wages, unemployment level, and changes in payrolls) remain at normal levels in our view. However, these metrics are generally trending down from unusually higher levels since mid-2020. Further, the market, and particularly large stocks, are trading at healthy valuations (such are higher than average price-to-earnings ratios).1 Generally higher valuations imply that investors expect higher levels of earnings growth to continue. As a result, when "growth", be it economic or earnings growth, gets questioned then higher valuations also get questioned.
Fortunately, the market is made up of many different individual companies and not all are richly valued - especially, mid-cap and small-cap stocks, which look reasonably valued on a historical basis.1 Further, we still have a positive view on the economy but acknowledge that the Federal Reserve could help ensure continued growth by lowering the Fed Funds rate to a level closer to the current rates of inflation (clearly our opinion).
. . . The equity markets declined throughout the week, notably on Friday, driven by concerns over economic growth after a handful of data came in softer than expected. September is a historically weak month for the markets. The seasonal weakness dates back to 1928, since then the S&P 500 benchmark has averaged a monthly decline of 1.2% and finished higher only 44.3% of the time, according to Dow Jones Market data.
After soft jobs and manufacturing reports, the S&P 500 is down about 4% from the recent highs but remains higher by more than 13% year-to-date. Along with the tech-heavy Nasdaq and the Dow Jones which slid 5.8% and 2.9% for the week, but remain up more than 11% and 7% year-to-date.
Employment Data - Nonfarm Payrolls, Employment Rate, Average Hourly Earnings
The U.S. labor market update was a key focus point for investors last week. Overall, the labor market data showed consistent signs of weakening but remained above recessionary levels. Friday’s release of theU.S. nonfarm job reportwas the most highly anticipated with other payroll data announced earlier in the week. Including theJOLTs job opening datawhich fell to 7.7m, the lowest level of the year, and theADP private employment data, which showed 99k new jobs added to the economy, the lowest level since 2021.
The U.S. nonfarm payrolls report confirmed signs of weakness in the labor market, noting numerous downward revisions and a clear softening trend in new jobs added. The economy added 142k jobs in August versus the 164k expected. The past two month’s figures were also revised lower by 86k, to reflect a three-month average job gains of 116k. Employment growth in August was in line with recent months but below the average monthly gain of 202k over the prior 12 months and 334k over the past three years. On a positive note, the unemployment rate dropped from 4.3% to 4.2% and average hourly earnings saw a higher-than-expected increase, growing 0.4% compared to the prior month’s decline of -0.1%.
Federal Reserve - Interest Rate Expectations Following the jobs report, markets have shifted their attention to the path of the Federal Reserve and how softer-than-expected employment and inflation readings could impact the potential for interest rate cuts. The Fed has recently shifted its focus from improving inflation conditions to weakening developments in the labor market, the other side of its dual mandate which includes stable prices and full employment.
Fed Chairman Jerome Powell has stated the committee does not wish to welcome further cooling in labor market conditions. Given the recent softening seen in employment and wages, the market believes the Fed is likely positioned to begin cutting the fed funds interest rate at the upcoming September meeting, to offer support to employment.
According to the CME FedWatch tool, the market is pricing in a 75% chance of a 25 basis point cut at the September 18th FOMC meeting, bringing the fed funds rate to 5.00 – 5.25% from where it currently stands at 5.25 – 5.50%. The markets are also expecting a smaller likelihood, roughly a 25% chance, of a 50 basis point cut which would bring the fed funds rate a range of 4.75 – 5.00%.2
[1]https://yardeni.com/charts/stock-market-p-e-ratios/ [2]CME FedWatch - CME Group | Upcoming Reports Monday: Consumer Inflation Expectations, Atlanta Fed GDPNow Tuesday: OPEC Monthly Report, Fed Vise Chair for Supervision Barr Speaks Wednesday: Consumer Price Index (CPI) Thursday: Producer Price Index (PPI), Fed's Balance Sheet, Initial and Continued Jobless Claims Friday: Michigan Consumer Expectations and Sentiment | Market Performance Stats |  | Thank you for reading. If you have any questions or concerns, or would like to speak with a member of our team, please click the button below to reach out to us. We would love to hear from you! | |
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