Weekly Economic Update: September 10, 2024

Presented by Nicholas Wealth Management

When bad news finally means bad news

The beginning of September was a stark reminder of just how volatile September and October have been historically. After a strong end to August, we returned from the long Labor Day weekend to a skittish market — and it didn’t take much to send us into the dumps.

We opened last week with renewed fears of an economic slowdown when the ISM manufacturing index missed consensus expectations on Monday. Activity in the manufacturing sector has contracted in 21 of the last 22 quarters. Oil added to the turmoil, settling at its lowest close since last December at under $70 per barrel amid China demand worries, which further fueled talk of a global economic slowdown.

In response, the market — which was bid up on Friday before Labor Day on nothing but thin air and even thinner pre-holiday weekend volume — collapsed. Both the Nasdaq and S&P 500 tumbled in their worst one-day close since Aug. 5. Volatile AI companies and chipmakers all got hammered because Nvidia’s good earnings weren’t astronomical.

Markets stabilized on Wednesday with the softer Job Openings and Labor Turnover Survey (JOLTS) number (see more below). But the markets couldn’t sustain the rebound and slid downward again. On Thursday, the ADP employment number disappointed as well and the market’s slow bleed continued.

All eyes turned to the Bureau of Labor Statistics (BLS) employment situation due out on Friday. When the report finally came, it confirmed the jobs market is finally rolling over and the economy is beginning to buckle in the face of higher interest rates and deficit spending.

Is this it? Are we finally going to have the recession everyone has been predicting for the past 2+ years? Probably not, but only if the Federal Reserve takes meaningful and effective action. The Fed probably should have cut at the end of July to show they were engaged and on top of things; they chose to drag their heels and wait on more data. We all saw the data this week showing soft economic numbers and fading jobs. Now markets are fretting over economic slowdown and recession fears — and that isn’t a good place to be.

The market is beginning to price in a 50-basis-point (.50%) cut in September. If the Fed cuts by only 25 basis points (.25%), it risks looking like it’s playing catch-up with the true state of the economy and being totally reactive.

We’ve said September and October tend to be volatile, and so far, September has stayed true to that reputation, delivering the worst week since March 2023. But as bad as last week was, did you think we would be over 5,600 on the S&P 500 at the end of August? Does a 250-point drop to 5,400 change the outlook when we were expecting the S&P 500 to end 2024 at 5,000? Are you on track with your goals? Remember, market volatility is normal, and nothing on the horizon is causing excessive concern. We will monitor developments and communicate new insights as needed.

The thing about jobs

Jobs are drying up: That’s the story from employment data released last week. The JOLTS report for July showed 7.67 million job openings, below the consensus range of 7.8 million to 8.2 million. The ADP employment report was also disappointing; we added 99,000 private-sector jobs in August, far fewer than the expected 140,000. According to Nela Richardson, ADP’s chief economist, “The job market’s downward drift brought us to slower-than-normal hiring after two years of outsized growth.”

Then we had Friday’s July nonfarm payrolls report from the BLS. Given how the week was going, it was unsurprising when this report also missed consensus expectations. Economists and market watchers were calling for 160,000 jobs to be added; instead, we added 142,000 and numbers for June and July were revised downward.

To state the obvious, the final shoe maybe hasn’t dropped but it is clearly falling. The Fed raised interest rates to tame inflation, which was driven by disrupted supply chains, stimulus payments, government spending and wage inflation due to a shortage of workers. Well, supply chains have been repaired, stimulus payments are gone and large government spending programs — such as the American Rescue Plan, Bipartisan Infrastructure Act and Inflation Reduction Act — are a thing of the past. The jobs market has hung in there with companies reluctant to reduce their workforce because it was so hard to staff up post-pandemic. Now the job market is rolling over and next week we will see if inflation follows suit. Is this the beginning of the approach to the soft landing or something else?

Coming This Week

• Markets will focus on inflation numbers this week and how they will affect the Fed’s actions at the meeting Sept. 17-18.
• We’ll start the week with wholesale inventories and consumer credit on Monday and the NFIB optimism index on Tuesday. However, the news cycle will be all about the presidential debate on Tuesday, so don’t count on the markets reacting to much of anything else early in the week.
• On Wednesday, we’ll get MBA mortgage applications plus the latest Consumer Price Index (CPI) numbers. CPI was at 2.9% and Core CPI was 3.2% at the last reading, and we need to see both continue to decline.
• We’ll get weekly unemployment claims on Thursday, which may be of more interest than usual given last week’s jobs report. We’ll also see the Producer Price Index (PPI) readings. PPI was at 2.2% and Core PPI was at 3.3% last month, and we also need to see continued improvement here.
• Finally, things will likely quiet down on Friday with consumer sentiment and import prices.
• Earnings season is officially over. The final tally revealed 79% of S&P 500 companies reporting positive earnings per share (EPS) and 60% reporting positive revenue. Earnings growth for the second quarter was 11.3%, the highest since the fourth quarter of 2021. For the current quarter, 59 companies have issued negative EPS guidance while 50 have issued positive EPS guidance. Valuation is still rich for the S&P 500, with the forward-12-month price-to-earnings (P/E) ratio at 20.6 vs. the 5-year average (19.4) and 10-year average (18.0).

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