Market Review 6th August 2024
Simplify the craziness
DAILY REVIEW
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3 min read
Market Rebound and Stabilization
After a tumultuous period marked by three consecutive daily declines of over 1% in the S&P 500, global equity markets found their footing on Tuesday. The S&P 500 surged by more than 1%, a significant recovery from its recent losses. This stabilization comes after a Civic holiday closure on Monday, during which the TSX lagged, declining by approximately 1%.
From a sectoral perspective, all eleven sectors of the S&P 500 ended the day in positive territory, with real estate and financials leading the charge, each gaining over 1.4%. Overseas, Japan's Nikkei index saw a remarkable rebound, gaining over 10% after a steep 12% decline on Monday. The Japanese yen, which had strengthened against the U.S. dollar for four consecutive sessions, weakened modestly on Tuesday, reflecting ongoing volatility influenced by institutional investors unwinding yen-based loans.
Bond yields, which had experienced a sharp decline in the previous week, ticked higher on Tuesday. The 10-year Government of Canada (GoC) yield rose to 3.12%, while the 10-year U.S. Treasury yield closed around 3.89%.
Macroeconomic and Fundamental Backdrop
Easing U.S. Monetary Policy
Concerns about future U.S. economic growth fueled a risk-off move in markets at the end of last week and the beginning of this week. These concerns were sparked by a softer-than-expected U.S. manufacturing report on Thursday and a weak jobs report on Friday. However, it is essential to avoid overreacting to a single month’s worth of data. The broader macroeconomic and fundamental backdrop remains relatively positive for several reasons.
Firstly, U.S. monetary policy is poised to ease. With signs of softening in the labor market, markets have priced in a roughly 65% chance of a 50 basis point (0.5%) Fed interest rate cut at the September meeting and are anticipating approximately 100 basis points (1%) of cumulative rate cuts in 2024. The bond markets have already adjusted in anticipation of these rate cuts, with the U.S. 2-year Treasury yield declining from over 4.5% in late July to around 4% currently. Lower borrowing costs are expected to support interest-rate-sensitive sectors such as manufacturing and housing, thereby bolstering broader economic growth.
Strong Corporate Earnings Growth
Volatility in the market last week was exacerbated by disappointing earnings reports from major technology companies like Intel and Amazon. Intel missed earnings expectations and announced a suspension of its dividend, while Amazon exceeded expectations but issued cautious forward guidance, underscoring the high expectations for mega-cap tech companies. Despite these setbacks, S&P 500 earnings are on track to grow by over 11% in the second quarter, up from the initial expectation of 7.8% at the beginning of July and significantly better than the 5.8% growth rate in the first quarter. For the full year, S&P 500 earnings are expected to grow by over 10%, which, if achieved, should provide robust support to equity markets.
Economic Growth: Cooling but Not Collapsing
The U.S. jobs report last week showed nonfarm payrolls rising by 114,000 in July, well below expectations of 175,000, and the unemployment rate climbing to 4.3%, the highest since 2021. While the gain in nonfarm payrolls represents a slowdown, the three-month average gain of approximately 170,000 is still in line with the average monthly gain in the decade leading up to the pandemic. Additionally, the rise in unemployment was primarily driven by an increase in labor supply rather than a contraction in employment.
On the growth front, U.S. real GDP rose by 2.8% in the second quarter, and the Atlanta Fed’s GDPNow tracker estimates third-quarter growth at 2.5%. These figures suggest an economy that is cooling but not collapsing.
Perspectives on Volatility
Market volatility, though uncomfortable, is a normal part of investing. Historically, the S&P 500 experiences about three 5% pullbacks per year and one 10% pullback. During these periods, it is crucial for investors to focus on their long-term goals and avoid making financial decisions driven by emotion. Missing just a handful of the best days in the market can significantly impact performance. For instance, from 1994 to 2023, the S&P 500 returned just over 10% per year on an annualized basis. However, missing just 10 of the best days in the market reduced the annualized return to 7.3%, highlighting the importance of maintaining a disciplined, long-term investment focus.
Conclusion
While recent market volatility and economic data have sparked concerns, the broader macroeconomic and fundamental backdrop remains supportive of growth. Easing monetary policy, strong corporate earnings, and a cooling—but not collapsing—economy provide a stable foundation for future growth. Investors are reminded to stay focused on their long-term goals and avoid making decisions based on short-term market movements. The resilience of the global markets amidst recent volatility underscores the importance of a balanced, disciplined approach to investing.
References
Edward Jones
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