Dear Friends,
Stocks must have gotten the memo that August tends to be weak historically. July, the eighth positive month in the past nine, was quickly forgotten as the beginning of August greeted us with a selloff. The primary catalyst was August 2’s weaker-than-expected employment report, which ignited concern that the U.S. economy could tip into recession. Several additional factors exacerbated the selling pressure: elevated valuations, and leverage in the financial system. Borrowing in the yen (the so-called carry trade) is unwinding as global markets fall and the yen surges — plus some institutional traders appear to have been caught offside in the downdraft, driving more forced selling. However, pullbacks and corrections — as painful as they are — are a normal part of investing. Think of them as tolls to pay on the road to attractive long-term returns. The S&P 500 and its predecessor indexes have gained 11.5% annualized since 1950, through some of the worst wars, recessions, financial crises, pandemics, and natural disasters in history. And that’s while averaging a drawdown of over 10% per year – even in up years. Fundamentals still look good enough to keep this bull market going even as the economy slows into the election. Additional downside may be modest, and opportunities may soon emerge, but bottoming is a process. Be patient and allocate wisely. Find out more about what is driving the markets in this week’s newsletter.
Economy, Geopolitics, and Commodities
1. July CPI Report: Inflation Rate Comes in Lower Than Expected
Inflation extended a run of cooler readings in July, sealing the case for the Federal Reserve to cut interest rates at its meeting next month. The consumer-price index rose 2.9% from a year earlier, the Labor Department said Wednesday, the lowest reading since 2021 and slightly below economists’ expectations of 3%. Core inflation, which excludes volatile food and energy items, was 3.2%, also a three-year low.
A sustained and broad inflation slowdown provides the Fed with greater latitude to focus on shoring up any potential weakness in the labor market. The data were “very encouraging…and should give the Fed lots of confidence to start the easing process,” said Kathy Bostjancic, chief economist at Nationwide. Markets reacted in muted fashion, a sign that investors have already moved on from worrying about inflation to fretting about the job market. Major stock indexes edged higher, while Treasury yields moved lower after initially climbing. Wednesday’s report wasn’t perfect. The cost of housing rose at a faster pace than it did in June. Still, broad improvement in other categories, from used cars to medical care, was enough to offset that one setback. The release marked the third consecutive month that core prices rose at a mild level consistent with the Fed’s inflation target, resuming a slowdown that began last year but was interrupted at the start of this year. After raising rates in July 2023 to their highest level in two decades, Fed officials have spent the year focused on when to start lowering them. A potential June cut was derailed in April after inflation turned upward. But now, a rate cut is on track both because of better inflation readings and signs that the labor market might weaken undesirably in the months ahead. The unemployment rate rose to 4.3% in July from 3.7% at the beginning of the year, reflecting tepid hiring even though layoffs have remained low for now. 1
2. US Jobless Claims Fall for a Second Week to Lowest Since July
Initial applications for US unemployment benefits fell for a second week to the lowest level since early July, despite a recent pullback in hiring. Initial claims decreased by 7,000 to 227,000 in the week ended Aug. 10, according to Labor Department data released Thursday. The median forecast in a Bloomberg survey of economists called for 235,000 applications. Economists and investors are on the watch for signs that the labor market may be weakening faster than anticipated after the July employment report showed the jobless rate rose for a fourth month and hiring slowed. First-time applications for unemployment benefits have trended up this year but remain subdued near 2019 levels.
Continuing claims, a proxy for the number of people receiving unemployment benefits, also declined, to 1.86 million, in the week ended Aug. 3. Jobless claims data can be noisy from week to week, especially at this time of year when they’re prone to swings due to school closures for summer break. The four-week moving average, a closely watched metric that helps smooth out the data, fell to 236,500. The moderation in the job market, alongside recent improvement in inflation, reinforces the case for the Federal Reserve to lower interest rates next month during its September policy meeting.2
3. Mortgage Rates Drop to 15-Month Low
Mortgage rates fell to the lowest level in more than a year, raising hopes for relief in the battered U.S. housing market. The average rate on the standard 30-year fixed mortgage fell around a quarter percentage point to 6.47%, according to a survey of lenders released Thursday by mortgage finance giant Freddie Mac, a low not seen since May 2023 and the sharpest weekly decline in around nine months. If sustained, lower mortgage rates could help shepherd some Americans back into a market that they have been priced out of in recent years.
Home sales last year fell to their lowest level in nearly three decades, and they have been similarly sluggish in 2024. Mortgage rates have roughly doubled since the Federal Reserve began its campaign to curb inflation in early 2022, which has dramatically pushed up the monthly cost of borrowing for a home. The inventory of homes for sale has been rising but it remains well below historic averages, which could keep a damper on sales activity unless supply picks up. But the past week’s big drop is raising hopes that it could spur more buyer interest. Mortgage applications rose last week, though they were driven by an increase in refinance activity rather than new purchases, according to the Mortgage Bankers Association.1
4. Japan’s Economy Sees Consumption-Led Rebound in Tailwind for BOJ
Japan’s economy rebounded to growth in the second quarter on the back of an increase in private consumption, in a sign that a virtuous cycle long sought by the central bank linking rising incomes to increased spending may be starting to emerge. Gross domestic product expanded at an annualized pace of 3.1% in the three months through June versus the prior period, the Cabinet Office reported Thursday. The reading, which exceeded the 2.3% consensus estimate, came after the economy contracted by a revised 2.3% in the first quarter.
Thursday’s data indicated that a long-awaited recovery in personal spending may finally be underway after large companies agreed to offer the biggest wage increases in more than three decades and the government implemented a tax rebate. Until the latest period, consumption had fallen in every quarter for a year. Thursday’s figures will be welcome news for the Bank of Japan, which has been looking for evidence that wage gains will spur personal spending and generate stable demand-led inflation. Last month the BOJ raised its benchmark interest rate for a second time this year and unveiled a plan to halve monthly bond purchases by the first quarter of 2026 as it continues to normalize policy after years of unprecedented easing.2
5. U.S. Crude Oil Stockpiles Rise After Six Straight Declines
U.S. crude oil inventories rose for the first time in seven weeks, while gasoline and distillate fuel stocks fell amid increases in demand, according to data released Wednesday by the U.S. Energy Information Administration. Commercial crude oil stocks excluding the Strategic Petroleum Reserve rose by 1.4 million barrels to 430.7 million barrels in the week ended Aug. 9 and were about 5% below the five-year average for the time of year, the EIA said.
This crude stock build followed six consecutive weeks of withdrawals. Analysts surveyed by The Wall Street Journal had predicted crude stockpiles would fall by 1.2 million barrels. Stocks of gasoline fell by 2.9 million barrels to 222.2 million barrels, and distillate fuel inventories declined by 1.7 million barrels to 126.1 million barrels. Refineries ran at 91.5% of capacity, up from 90.5% the previous week.1
Financial Markets
1. Stocks Close Higher Friday as Market Comeback
U.S. stocks rose on Friday as investors closed out the best week of 2024, part of a market comeback from a violent rout to begin August. The S&P 500 added 0.2% to 5,554.25, while the Nasdaq Composite gained 0.21% to 17,631.72 on Friday. The Dow Jones Industrial Average rose 96 points, or 0.24% to 40,659.76. For the week, the S&P 500 added nearly 3.9%, its best week since November 2023. The Nasdaq gained 5.2% while the 30-stock Dow advanced 2.9% on the week.
Following the comeback this week, the S&P 500 is now just 2% away from its mid-July record high. Data this week helped assuage a jittery market. Retail sales data released Thursday came in much stronger than economists expected, while weekly jobless claims fell. Both offered evidence that recession fears, which helped spark a global sell-off earlier this month, were overblown. Inflation readings released earlier this week also bolstered hopes that a soft-landing scenario was still possible. Shares of Nvidia are among the biggest winners in technology stocks on the week with a gain of more than 18%. Apple and Microsoft advanced roughly 4% and 3%, respectively, for the week.3
2. Walmart Beats Estimates, Raises Outlook as It Sees Stable Consumer Health
Walmart raised its forecast for the year on Thursday, as quarterly revenue grew nearly 5%, the company’s stores and website drew more visits, and sales outside the grocery department improved. The discounter beat Wall Street’s expectations for sales and profits, and its shares climbed 6% in morning trading. Walmart said it now expects sales to rise by 3.75% to 4.75% for the full year, and adjusted earnings to come in between $2.35 and $2.43 per share. It previously said it expected to be on the high end or slightly above its initial full-year guidance, which called for net sales growth of 3% to 4% and adjusted earnings per share of between $2.23 and $2.37.
While Walmart raised its outlook, its projected second half of the year may not be as strong as Wall Street anticipated. The retailer expects adjusted earnings of 51 to 52 cents per share in the third quarter, below analysts’ expectations of 54 cents. Analysts also expected adjusted earnings of $2.43 per share for the year — the highest point of Walmart’s guidance. In an interview with CNBC, Chief Financial Officer John David Rainey said the company’s brighter outlook reflects strength in the first half of the year. He said Walmart decided against raising expectations for the back half of the year, especially since the 2024 election, unrest in the Middle East and other dynamics may influence consumer sentiment.3
3. U.S. Battery Rush Spurs $1.4 Billion Sodium-Ion Factory in North Carolina
A startup developing a high-tech battery that is seen as a potential game-changer in the booming industry plans to invest $1.4 billion to build its first big plant in North Carolina, according to people familiar with the matter. Natron Energy is one of the few U.S. companies focusing on sodium, an abundant mineral that can produce batteries that are cheaper and safer than the lithium-based batteries that power electric vehicles. Investors have poured roughly $300 million into the company, according to PitchBook. Natron has also gotten backing from Washington.
Businesses have pledged to build more than $100 billion in EV and battery factories in the U.S. in the two years since a climate law passed and introduced tax credits for domestic manufacturing. Natron’s technology is seen as one way the U.S. can build its own battery industry and reduce dependence on China for batteries and raw materials. Subsidies and tariffs on Chinese imports are part of a global race to develop and control next-generation technologies, critical to making electric cars go farther and charge faster. Better batteries are also needed to store intermittent wind and solar power and stabilize power grids. Natron’s batteries are coveted because they use sodium instead of lithium, which is expensive to produce and notoriously volatile in price. They also avoid troublesome metals such as cobalt and rare earths that pose supply-chain and human-rights risks to big battery users. The technology is less fire-prone and can operate in colder climates, proponents say.2
4. Starbucks Replaces CEO Laxman Narasimhan With Chipotle CEO Brian Niccol
Starbucks announced Tuesday it’s replacing CEO Laxman Narasimhan with Chipotle CEO Brian Niccol, sending its stock soaring 24.5%, its best day ever. Chipotle’s stock fell over 10% on the news that Niccol would leave after a successful tenure at the burrito chain. Narasimhan’s departure is effective immediately. Starbucks CFO Rachel Ruggeri will step in as interim chief executive until Sept. 9, when Niccol officially assumes the top job.
Narasimhan took over as chief executive in March 2023. The coffee giant’s performance has struggled this year, hurt by weak sales in the U.S. and China, its two largest markets. In its latest quarter, Starbucks reported a 3% decline in same-store sales. Pressure on the company mounted as it struggled to drive traffic to stores. Former CEO Howard Schultz, who handpicked Narasimhan as his successor, had written an open letter in May, weighing in on the company’s issues and offering advice but never addressing Narasimhan by name. Activist investor Elliott Management had acquired a stake in the company in recent weeks.3
Sources:
(1) www.wsj.com
(2) www.bloomberg.com
(3) www.cnbc.com
(4) www.reuters.com
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Investing in stock includes numerous specific risks, including the fluctuation of dividends, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging market securities involves special additional risks. These risks include but are not limited to currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The Legacy Foundation and LPL Financial do not offer tax advice.
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