Market Review 4th September 2024

Simplify the craziness

DAILY REVIEW

5 min read

September kicked off with back-to-back losses for U.S. equity markets, adding to investor caution during a seasonally challenging period for stocks. Following a steep sell-off on Tuesday, major U.S. indices faced further losses on Wednesday, albeit at a more modest pace. Both the S&P 500 and Nasdaq Composite finished lower, while the Dow Jones managed to edge into positive territory, showing resilience amid rising uncertainties.

Canadian markets also struggled as the Bank of Canada (BoC) cut interest rates for the third time this year, sparking concerns over economic growth prospects. In this summary, we analyze the factors behind the market's recent performance, upcoming economic indicators, and their potential impact on stocks moving forward.

A Second Consecutive Day of Losses

S&P 500 and Nasdaq Composite Decline Again

S&P 500: Fell by 0.16% to close at 5,520.07, marking its second consecutive day of losses after Tuesday's 2% drop.
Nasdaq Composite: Slipped by 0.3%, settling at 17,084.30.
Dow Jones Industrial Average: Outperformed, rising 0.09%, adding 38.04 points to close at 40,974.97.

Following the steep sell-off on Tuesday, Wednesday’s losses were modest but continued to reflect investor caution. The major indices have been struggling in what is typically one of the weaker periods for equities. According to Truist’s co-chief investment officer, Keith Lerner, “investors are a bit on edge; it’s a low-conviction trade.”

Technology Sector Takes a Hit

The technology sector faced the brunt of the selling pressure:

Nvidia (NVDA): Fell 1.7% on Wednesday, after reports that the U.S. Department of Justice issued subpoenas to the company. Nvidia had already tumbled over 9% in Tuesday’s sell-off, leading a broader pullback in semiconductor stocks.
Chip stocks: Some regained ground, with Advanced Micro Devices (AMD) and Tesla bouncing back by 3% and 4%, respectively. Other chipmakers such as Marvell Technology and Broadcom also recovered some losses.

This sector, which had been a standout performer in 2024, is now facing heightened volatility, with Nvidia's decline driving broader weakness among semiconductor stocks.

Yield Curve Normalizes, Calming Some Recession Fears

The U.S. Treasury yield curve, which had been inverted in recent weeks—a classic signal of a looming recession—momentarily returned to a normal state. The inversion of the 2-year and 10-year Treasury yields had been one of the significant concerns weighing on markets. On Wednesday, the 10-year yield evened out with the 2-year yield and briefly surpassed it, giving investors a glimmer of hope that recession risks may not be as pronounced as previously feared.

Canadian Markets React to Bank of Canada Rate Cut

BoC Cuts Rates to 4.25% Amid Slowing Growth Concerns

The Bank of Canada cut its benchmark interest rate for the third time this year on Wednesday, reducing it from 4.5% to 4.25%. This decision comes as inflation appears to be easing, but concerns about economic growth loom large.

The BoC’s rate cut was aimed at providing relief to the economy, which has been showing signs of cooling. Canada’s inflation has been trending down, and the central bank highlighted the increased risk that economic growth could slow more than anticipated.

Investor Reaction: A Cautious Approach

Canadian equity markets, like their U.S. counterparts, took a hit as investors reacted to the rate cut. While lower interest rates generally support economic activity by reducing borrowing costs, they also signal central bank concerns about the overall health of the economy.

TSX Composite Index: Suffered a modest decline, following broader global market trends.
Bond Yields: Canadian bond yields also fell, reflecting investor expectations of slower economic growth in the months ahead.

The Bank of Canada’s actions were not entirely unexpected, but they underscore the challenges that both Canada and the U.S. face in managing inflation and growth simultaneously.

Key Drivers for the Market

U.S. Labor Market Data on Friday

Perhaps the most anticipated economic event of the week is the U.S. nonfarm payrolls report, set to be released on Friday. Markets will be watching closely to gauge the strength of the labor market and its implications for Federal Reserve policy.

Previous data: Last month’s nonfarm-jobs report showed the unemployment rate rising from 4.0% to 4.3%, its highest level of the year.
Forecast: The August nonfarm report is expected to show an improvement in the unemployment rate, ticking down to 4.2%, with 165,000 jobs added, up from 114,000 last month.

The outcome of this report could provide clarity on the broader state of the U.S. economy. If the data aligns with market expectations, it could alleviate some recession fears, as the labor market would appear to remain resilient. However, a weaker-than-expected report could reignite concerns of an economic slowdown.

Federal Reserve Meeting on September 18

In addition to the labor market data, the next significant event on investors’ radar is the Federal Reserve’s interest rate decision on September 18.

Expected Rate Cut: Markets are pricing in a likely rate cut of 25 basis points, which would bring the federal funds rate down from 5.25%-5.5% to 5.0%-5.25%.
Focus on the "Dot Plot": Investors will be keen to analyze the Fed’s "dot plot," which provides insights into the future trajectory of interest rates based on the expectations of FOMC members.

Given that inflation has already fallen below the Fed’s 2024 target of 2.6% and the unemployment rate has risen above the Fed’s 4.0% target, a rate cut seems to be the most likely outcome. Historically, when the Fed eases monetary policy without a recession in sight, equity markets tend to perform well, which could bode well for the remainder of 2024.

Investor Sentiment: Pullback Anticipation and Volatility

Historical Weakness in September and October

September is known to be a particularly volatile month for equities, and this year appears to be no different. Following the strong rally through August, markets are now entering a seasonally weaker period.

Volatility: Traders are bracing for more market swings in September, with many anticipating a potential pullback of 5% or more. According to TD Wealth’s chief investment strategist, Sid Vaidya, "short-term volatility is part of the normal market course," and investors should not overreact to recent movements.

Bank of America Reports Stock Sell-Off

Bank of America (BofA) released a report noting that investors dumped U.S. stocks at the fastest pace since November 2020 in the final week of August. The Wall Street firm’s clients were net sellers of U.S. equities for the second straight week, offloading $8 billion worth of stocks.

Institutional and Hedge Fund Activity

Large, Mid-, and Small-Cap Stocks: Investors sold across all capitalizations, signaling broad-based uncertainty.
Institutional Investors: Led the selling, alongside hedge funds, while private investors continued their selling streak for a fourth consecutive week.

Despite the heavy selling, the S&P 500 managed to eke out a 0.2% gain last week, closing August with a monthly gain of 2.3%. However, the selling pressure from large investors could reflect increased concerns about near-term market risks, particularly in light of upcoming economic data releases and Federal Reserve decisions.

References

Bank of America Report on Investor Stock Sell-Off: Link
Nvidia DOJ Subpoenas News: Link
U.S. Nonfarm Payrolls Forecast and Data: Link
Bank of Canada Rate Cut Announcement: Link
Federal Reserve Meeting Preview and Rate Cut Expectations: Link
S&P 500 Historical Performance and Volatility Trends: Link

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