Stocks Plummet on Weak Economic Data; Bonds Rise Sharply
Good morning,
The Dow (-2.1%), NASDAQ (-3.4%), and S&P 500 (-2.1%) each fell sharply for the week. This marks the 3rd consecutive week of losses for the S&P 500 and the NASDAQ, with the latter dropping over 10% from its peak, which is considered in correction territory. Conversely, taxable bonds gained 2.4% and tax-free municipal bonds gained 1%. The 10-year Treasury yield fell 0.4% to end the week at 3.80%. The drop in Treasury yields also caused mortgage rates to fall last week, reaching their lowest rate (about 6.4%) in a year.
The Fed met last week and announced that it would not cut interest rates in July, but hinted that a rate cut in September was likely. At first, this was met with delight by investors until other poor economic data came out afterward. The Institute of Supply Managers (ISM) Manufacturing data, as well as new orders both declined and remain in contraction territory. This was followed by a rise in unemployment claims, pushing the unemployment rate up to 4.3%, its highest rate in almost three years. Then on Friday, the July jobs report came in considerably below economists’ expectations. The combination of this data caused the markets to drop sharply, especially on Friday.
Many pundits believe that if the Fed saw the labor report data, they might have lowered rates on Wednesday. In fact, it is now almost a foregone conclusion that the Fed will cut rates in September, and the bond market is now pricing in a 70% chance the Fed cut rates by 0.50%, rather than 0.25%, as previously anticipated. Markets continue to tumble this morning, as the US pre-markets show a drop of over 3%, and the Japanese Nikkei index fell a remarkable 12% overnight. On a more positive (less negative?) note, about 75% of S&P 500 companies have reported their earnings, and they have not been bad. Their profits have remained strong, but their revenues are slowing a little. Remember that stock prices heavily rely on the company’s earnings and profits, and they remain strong.
Here's our take. The markets have been running solidly higher the past two years, especially the technology and AI-related stocks. Many pundits believe that the markets were overpriced, so this sudden drop is “healthy” by bringing stocks back to where they belong. Their rise was based on perfection and a soft landing, but recent economic data is suggesting that all the rate hikes in 2022 and 2023 are now showing their impact on the US economy. Some are now saying the “R” word – recession. August and September tend to also be the weakest months for stocks, and this could possibly set itself up as a great buying opportunity in a month or so. In short, we believe that there is no need to panic at this time.
Have a great day and terrific week. If you have any questions or concerns, please do not hesitate to contact us.
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The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
