Dear Friends,
In the past two weeks, we’ve seen a lot of new economic data, including unemployment rate, manufacturing industry survey results, and Initial Jobless Claims. In the July FOMC meeting, the Fed elected to hold interest rates steady while other major central banks have taken action. Financial markets are reacting to this new information and the second quarter earnings reports from S&P 500 companies. For major tech companies, positive earnings surprises are leading to smaller gains, while negative surprises are causing larger drops, as seen with Amazon. Overall, there has been a trend of selling stocks and buying long-term bonds due to higher expectations for the Fed to cut rates in September, but the market is still buying companies with strong earnings. Find out more about what is driving the markets in this week’s newsletter.
Economy, Geopolitics, and Commodities
1. U.S. Hiring Slowed Sharply
Job growth slowed sharply in July and the unemployment rate rose to its highest level since 2021, adding to evidence that a labor market whose strength is fading could actually be on its way to weakness. America is still adding jobs, but no longer at a red-hot pace. The Labor Department reported on Friday that employers added 114,000 jobs last month, missing expectations. The unemployment rate jumped to 4.3% — its highest level in nearly three years, when the labor market was still clawing its way back from the pandemic.
Average hourly earnings were up 3.6% in July from a year earlier — above the recent pace of inflation, but the smallest gain since May 2021. The job count for May and June was revised down by a combined 29,000. But the jump in the unemployment rate was from more people looking for jobs, rather than people losing their jobs. The labor-force participation rate, the share of working-age people who were employed or seeking work, rose to 62.7% from 62.6% in June. Absent the increase in participation, the unemployment rate would have stayed at 4.1%.
To a degree, the slowdown in job creation last month might reflect the effects of Hurricane Beryl. The hurricane made landfall in Texas on July 8th, near the start of the week the Labor Department uses for its employment readings. In the storm’s wake, there was a notable move up in weekly readings on initial claims for unemployment insurance filed in Texas. The Labor Department on Friday said that 461,000 people with jobs were unable to work because of the weather in July. The average number of people missing work because of the weather over the previous 10 Julys was 37,000. The August job figures could see a rebound, as those storm effects reverse. 1
2. Fed Meeting July 2024: Key Takeaways from Fed’s Decision to Hold Rates
Here are key takeaways from the Federal Reserve’s interest-rate decision this Wednesday:
Federal Open Market Committee votes unanimously to leave the benchmark rate unchanged in a target range of 5.25%-5.5%, a more than two-decade high, for the eighth straight meeting. The statement tweaks language to say, “the committee is attentive to the risks to both sides of its dual mandate”; it had previously said officials were “highly attentive to inflation risks”. The statement repeats prior language saying the FOMC doesn’t expect to cut rates “until it has gained greater confidence that inflation is moving sustainably toward 2%”. The Fed also tweaked language to say price pressures remain “somewhat” elevated and to acknowledge “some further progress” toward the inflation goal, from “modest further progress” in the previous statement. Officials also adjusted their assessment of the labor market, saying job gains “have moderated” and the jobless rate “has moved up but remains low”. The statement notes that risks to achieving employment and inflation goals “continue to move into better balance”. The decision is unanimous for the 17th straight meeting.
Federal Reserve Chair Jerome Powell said officials could cut interest rates at their meeting in September, moving closer to a new phase that seeks to avoid weakness in the labor market in the midst of signs inflation is heading lower. During the 50-minute news conference, Powell cited better news on inflation, a desire to prevent a material rise in unemployment and his view that the Fed’s policy is beginning to slow activity more meaningfully. His remarks did little to dispel widespread expectation in financial markets of a rate reduction at the next meeting.2
3. Bank of England Cuts Rates After Fed Held Off
The Bank of England cut its key interest rate for the first time in over four years, leaving the Federal Reserve among a dwindling number of central banks that have yet to cut borrowing costs in the face of cooling inflation. The U.K. central bank lowered its benchmark lending rate by a quarter-percentage point to 5% Thursday. It had kept rates at their highest levels since 2008 for the past year, crimping lending and heaping pressure on the U.K.’s heavily indebted government. Investors went into the meeting split over whether the central bank would cut now or wait for further signals of ebbing inflation.
U.K. inflation has come back down to the bank’s 2% target, but policymakers remained wary of elevated services inflation, which was unexpectedly high at 5.7% in June. One-off factors like a rise in hotel prices driven by a Taylor Swift tour and annual increases on inflation-linked phone contracts were partially responsible, according to economists. Ultimately, five of the bank’s policymakers voted for the quarter-point cut, while four voted to keep rates steady, unconvinced that inflation in the U.K. was sufficiently tamped down. Central banks around the world have wrestled with how quickly to bring down borrowing costs, wary of stimulating economic activity before inflation is fully contained. Job markets have begun to cool but unemployment rates in the U.K. and throughout the developed world remain close to record lows. On Wednesday, The Fed opted to keep interest rates steady in a range between 5.25% and 5.5%, a two-decade high. But Fed Chair Jerome Powell said officials could cut them in September. While the Fed has stood pat, the BOE’s move aligns it with most other developed-market central banks, which have begun cautiously lowering rates but aren’t expected to return soon to the rock-bottom levels seen before the inflation crisis.1
4. Bank of Japan Raises Rates, Driving Up Yen
The Bank of Japan on Wednesday raised its benchmark interest rate and cited concerns about the historically weak yen, leading to a jump in the Japanese currency. The decision was the latest sign of a rethink among central banks about the effects of higher interest rates on economic growth. Gov. Kazuo Ueda embraced a view spreading among Japanese officials that a rate increase, normally seen as constricting the economy, could instead help growth by pushing up the yen and reassuring consumers who have had to pay more for imported goods. The steps, spurred by higher inflation in Japan, mark a return to what officials have described as a more normal monetary policy. In March, the Bank of Japan ended the world’s last negative interest-rate policy and said it would stop trying to control Japanese government bond yields.
Economists in the U.S. have also been re-examining the effects of higher interest rates because the U.S. economy has continued to record solid growth after the Federal Reserve ratcheted up rates. Some analysts believe higher rates might actually be stimulating the economy to some degree because more income is flowing to people from their savings and investments. A narrowing interest-rate differential between Japan and the U.S., where the Federal Reserve is expected to start cutting rates this year, could shift global investment flows. Japan has trillions of dollars in overseas holdings, and some Japanese investors might bring their money back home if they can earn more on yen-based investments.1
5. Oil Down $2 as Investors Digest Weak Us Job Data
Oil prices slid by more than $2 on Friday, on track for a fourth successive weekly drop after data showed that the U.S. economy added fewer jobs than expected in July and weak Chinese economic data further weighed. Brent crude futures fell $2.61, or 3.28%, to $76.91 a barrel by 11:52 a.m. ET. U.S. West Texas Intermediate crude futures were down $2.82, or 3.7%, at $73.49. U.S. crude futures fell by more than $3 per barrel during the session.
Economic data from top oil importer China and a survey showing weaker manufacturing activity across Asia, Europe and the United States raised the risk of a sluggish global economic recovery that would weigh on oil consumption. Falling manufacturing activity in China also inhibited prices, adding to concerns about demand growth after June data showed imports and refinery activity lower than a year earlier. Asia’s crude oil imports in July fell to their lowest in two years, sapped by weak demand in China and India, data from LSEG Oil Research showed. Meanwhile, OPEC oil output rose in July, a Reuters survey found on Friday, as a rebound in Saudi Arabian supply and small increases elsewhere offset the impact of ongoing voluntary supply cuts by other members and the wider OPEC+ alliance.4
6. Feature on UVA Swimmer Kate Douglass
Virginia women’s swimming alumna Kate Douglass won gold in the 200 Breaststroke on Thursday (Aug. 1) in the swimming competition at the Paris 2024 Olympic Games being held at the Paris La Defense Arena in Paris, France. Douglass won the race in 2:19.24, breaking her own American record in the event.
Douglass is the first Cavalier across all women’s sports to win an individual gold medal at the Olympic games. All previous Cavalier golds were won in team sports and relays. This was Douglass’s second career individual Olympic medal after winning bronze at Tokyo 2020 in the 200 IM. She was the silver medalist in the 200 Breast at the World Championships earlier this year. This is Douglass’s second medal at Paris 2024 after winning silver in the 4×100 Free Relay. It is the second gold medal for the American women in swimming at Paris 2024.
Douglass was the top seed in the final after posting a 2:19.74 in Wednesday’s semifinal. In the final, she finished 0.36 ahead of South Africa’s Tatjana Smith. Tes Schouten of the Netherlands took the bronze with a 2:21.05. Douglass set the previous American record of 2:19.30 in the 200 Breast in February of this year at the TYR Pro Swim Series in Knoxville, Tenn. Douglass, who graduated in 2023, was a two-time Honda Award Winner for Swimming, two-time CSCAA Swimmer of the Year and two-time ACC Swimmer of the Year. She helped Virginia to three straight NCAA Team Championships, winning seven career individual NCAA titles and eight NCAA relay golds. She was a 28-time All-American and a 28-time All-ACC performer.6
Financial Markets
1. Dow Closes Down 600 Points, Nasdaq Enters Correction After Weak Jobs Report
Stocks fell sharply on Friday, as a much weaker-than-anticipated jobs report for July ignited worries that the economy could be falling into a recession. The broad-market index dropped 1.84% to end at 5,346.56. The Nasdaq Composite lost 2.43% to close at 16,776.16, bringing the decline for the tech-heavy index from its recent all-time high to more than 10%. The Dow Jones Industrial Average fell 610.71 points, or 1.51%, to finish at 39,737.26. At its session low, the 30-stock index was down 989 points.
Stocks sank after July job growth in the U.S. slowed more than expected, while the unemployment rate rose to the highest since October 2021. Nonfarm payrolls grew by just 114,000 last month, the Labor Department reported, a slowing from 179,000 jobs added in June and below the 185,000 expected by economists polled by Dow Jones. The unemployment rate increased to 4.3%. The 10-year Treasury yield fell to its lowest since December as investors flooded into bonds for safety on the fear the Federal Reserve made a mistake this week by keeping interest rates at current levels. It’s been a volatile week with the S&P 500 moving more than 1% in each of the last three trading sessions. The stock market had rallied Wednesday when the Fed gave a strong hint that a rate cut was coming at its next meeting in September. After Friday’s weak job figures, many investors are starting to believe the central bank should have acted on Wednesday.3
2. Second Quarter Earnings Updates
At close to the midpoint of the second quarter earnings season, the S&P 500 is reporting mixed results. On the one hand, the percentage of S&P 500 companies reporting positive earnings surprises is above average levels. On the other hand, the magnitude of earnings surprises is below average levels. On the one hand, the index is reporting higher earnings for the second quarter today relative to the end of the quarter and reporting its highest (year-over-year) earnings growth rate since Q4 2021. On the other hand, the market is rewarding positive EPS surprises reported by S&P 500 companies less than average and punishing negative EPS surprises reported by S&P 500 companies more than average.
Overall, 41% of the companies in the S&P 500 have reported actual results for Q2 2024 to date. Of these companies, 78% have reported actual EPS above estimates, which is above the 5-year average of 77% and above the 10-year average of 74%. In aggregate, companies are reporting earnings that are 4.4% above estimates, which is below the 5-year average of 8.6% and below the 10-year average of 6.8%. Historical averages reflect actual results from all 500 companies, not the actual results from the percentage of companies that have reported through this point in time. During the past week, positive EPS surprises reported by companies in multiple sectors (led by the Industrials and Communication Services sectors) were mostly offset by downward revisions to EPS estimates for a company in the Healthcare sector, resulting in a small increase in the overall earnings growth rate for the index over this period. Since June 30, upward revisions to EPS estimates and positive EPS surprises reported by companies in the Financial sector, partially offset by downward revisions to EPS estimates for companies in the Energy and Healthcare sectors, have been the largest contributors to the increase in the overall earnings growth rate for the index over this period.5
3. Amazon Shares Slide as Spending Surges and Revenue Outlook Disappoints
Amazon shares slipped Thursday after it projected weaker-than-expected revenue growth and said it would continue to ratchet up spending to meet anticipated demand for artificial intelligence services. The company’s total sales rose 10% from a year earlier to $148 billion during the three-month period ending in June. Its profit was $13.5 billion. Its sales were in line with analysts’ expectations, while its profit was higher than predicted. Revenue from Amazon’s cloud computing unit, Amazon Web Services, grew by about 19% to a higher-than-expected $26.28 billion. The business has shown renewed strength after experiencing a slowdown in 2023. Shares of Amazon—which had risen more than 20% so far this year—fell more than 7% in after-hours trading Thursday.
Like many of the top companies in technology, Amazon has been ramping up its spending on the data centers, real estate, and chips needed to meet the surging demand for computer power that has come with the rise of artificial intelligence. Amazon’s purchases of property and equipment, a measurement of its capital spending, was $17.62 billion in the second quarter. That is more than 50% higher than the year-earlier level and the highest quarterly spending since 2021. Chief Financial Officer Brian Olsavsky said the company’s strong capital spending will continue in the near term.1
4. Nasdaq 100 Is in Correction Territory with AI Darlings Sinking
The violent rotation from Big Tech plunged the Nasdaq 100 Index into correction territory, wiping out more than $2 trillion in value in just over three weeks, as traders unwound bets that had been minting money for over a year. The index was down 2.2% in midday trading on Friday, taking its loss since hitting a record on July 10 past 10%. If that holds through the end of the session, it will meet the definition of correction. The index remains up nearly 10% for the year.
Several mega caps have seen concentrated selling, with both Nvidia Corp. and Tesla Inc. down more than 20% from recent highs, putting them in bear-market territory. Meanwhile, Microsoft Corp. and Amazon.com Inc. have each lost more than 10%. However, except for Tesla, all remain higher for the year. The rotation away from tech began in earnest after reading on June prices showed cooling inflation, stoking bets the Fed is ready to cut rates. The initial beneficiary was small-capitalization stocks, with the Russell 2000 rising about 4.5% since then, compared with the Nasdaq 100’s 3.8% decline.2
Sources:
(1) www.wsj.com
(2) www.bloomberg.com
(3) www.cnbc.com
(4) www.reuters.com
(5) www.factset.com
(6) virginiasports.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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