Seasonal Headwinds and Growth Concerns Weigh on the Market

Performance for Week Ending 9/6/2024:

The Dow Jones Industrial Average (Dow) fell 2.93%, the Standard & Poor’s 500 Index (S&P 500) lost 4.25% and the Nasdaq Composite Index (NASDAQ) finished off 5.77%. Sector breadth was negative with 9 of the 11 S&P sector groups closing lower. The Technology sector (-7.06%) led on the downside followed by Energy (-5.63%) and Communication Services (-5.05%).

*See below for Index Definitions

MARKET OBSERVATIONS: 9/2/2024  – 9/6/2024

The S&P 500 finished the holiday shortened week broadly lower after a batch of labor market data fanned fears the slowdown in economic growth is accelerating and the Federal Reserve is behind the curve in lowering interest rates. Seasonal headwinds may also be at work as the month of September tends to be the weakest month of the year. The S&P has delivered outsized losses in each of the last four Septembers and has fallen on average by 2.3% over the last 10-years.

On Friday, the Labor Department reported that nonfarm payrolls rose 142K in August, slightly lower than the 165K gain expected by economists. Job growth for July was revised down 25K to 89K and job growth for June was revised lower by 61K to 118K. The three-month average of payroll gains fell from 141K in July to 116K in August. On a positive note, the unemployment rate in August fell to 4.2% from 4.3% in July.

While a rate cut at the upcoming Fed meeting is all but a done deal, the debate over whether they will ease by a quarter or half percentage point remains front and center. On Friday, following the release of the payroll report, a couple Fed officials gave some nuanced clarity. Fed Governor Waller said that he expects that “cuts will be done carefully,” that the FOMC can act “quickly and forcefully” if “subsequent data show a significant deterioration in the labor market” Meanwhile, NY Fed President Williams said that “the stance of monetary policy can be moved to a more neutral setting over time,” that the recent data was “consistent with the good labor market that existed in the period before the pandemic,” and that the unemployment rate “remains relatively low by historical standards.” In Fed parlance, both statements appeared to suggest the Fed is leaning towards leaning toward a 25-basis point cut but is open to 50bp cuts at subsequent meetings if the labor market continues to deteriorate.

Beige Book: The Federal Reserve Beige Book was released last week. The report, which is a compilation of anecdotal evidence on economic conditions in each of the twelve Fed districts, said economic activity was flat or declining across most regions in the US in recent weeks. Economic activity grew slightly in three Districts, while the number of Districts that reported flat or declining activity rose from five in the prior period to nine. Contacts, however, generally expected economic activity to remain stable or improve somewhat in coming months. Employment levels were generally flat to up slightly and reports of layoffs were rare, although some firms noted cutting shifts and hours. Prices and wages increased modestly during the period.

Q2 Earnings – It’s a Wrap: With 498 of the S&P 500 members having already reported results, second quarter earnings season has come to an end. The bar was set relatively high at the start of earnings season with analysts expecting year-over-year growth of 8-9%. However, even with elevated expectations the S&P delivered stronger than forecast results of around 11.5%. Looking ahead, Bloomberg data shows analysts are expecting third quarter growth to slow to 5.1% before rebounding in the fourth quarter, where growth is currently forecast at 10.9%. Full year growth expectations have remained rock solid with earnings expected to grow 9.5% this year and 14.5% in 2025.

Economic Roundup: According to the Institute for Supply Management (ISM), US manufacturing activity contracted for a fifth straight month, reflecting faster rates of declines in production and new orders. Production slid to the lowest level since May 2020 while the forward-looking new orders component dropped to a 15-month low. Meanwhile, the index of prices paid for materials rose to a three-month high. On the labor front, the number of job openings fell in July to the lowest since the start of 2021, suggesting slowing demand for workers. Another labor market indicator US companies added the fewest jobs last month since the start of 2021. According to the ADP Research Institute, private payrolls increased 99K in August and the prior month’s gain was revised lower. The report showed payrolls fell in professional and business services, manufacturing, and information. Elsewhere, the US services sector expanded at a modest pace for a second straight month in August with the ISM’s index of services coming in at 51.5 (readings above 50 indicate expansion). Lastly, mortgage rates in the US held steady, giving homebuyers a crack at the lowest loan costs since May 2023. The average for a 30-year, fixed rate loan was unchanged at 6.35%, according to Freddie Mac.

The Week Ahead: Inflation reports for August and the first presidential debate between Harris and Trump will be the focal points for the week ahead. On the data front, all eyes will be on the consumer price index (CPI) release on Wednesday followed by the producer price index (PPI) on Thursday. The two data points will be the last reads on inflation ahead of the Fed’s September 17 & 18 FOMC meeting. Aside from inflation, the focus will also be on the University of Michigan consumer survey out on Friday. In politics, the main event with be the presidential debate between Donald Trump and Kamala Harris on Tuesday in Philadelphia. The Fed speaking calendar will be nonexistent as Fed members will enter into the traditional blackout period ahead of the following week’s Fed meeting.

— By Michael Schwager, Chief Market Strategist, Managing Director

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.