Equity Selloff Gains Steam with Soft Labor Market Report

Equity Selloff Gains Steam with Soft Labor Market Report

Equity markets declined for the third straight week as a softer-than-expected labor market update and busy earnings schedule weighed on investors. Global equities (represented by the MSCI All Country World Index) were down -2.01% while domestic stocks (represented by the S&P 500 Index) were down -2.05%.

US Federal Reserve

The US Federal Reserve kept their benchmark rate steady for the eighth consecutive FOMC meeting, as widely expected. However, Fed Chair Jerome Powell’s press conference and language changes in the Fed’s policy statement were taken as strong signs that a shift in monetary policy will happen at their next September meeting. Powell’s post-meeting remarks explicitly laid out that “we can afford to begin to dial back the restriction in the policy rate” and a September rate cut “could be on the table”.

Labor Market Update

While equities were up Wednesday following the Fed’s rate decision, markets fell sharply on Friday following a labor market update for July. Observers expected a moderating labor market picture, but job growth and the unemployment rate worsened more than anticipated. The Labor Department reported 114,000 nonfarm payrolls added to the economy for the month, missing consensus expectations of 175,000 and well below the 12-month average of 215,000. The unemployment rate rose to 4.3% from 4.1% unexpectedly, marking the highest level in nearly 3 years. While still low relative to historical levels, the 0.6% increase to the unemployment rate since January has been the fastest rise in a 6-month period since the pandemic.

Global Equities

Through the first seven months of 2024, global equities (represented by the MSCI All Country World Index) were up 13.10%. Despite a shift in the upward trend midway through the month of July, global markets still finished up 1.61% for the month, marking the eighth month of positive returns out of the past nine.

Earnings Season

Last week’s earnings schedule comprised of companies representing nearly 40% of the S&P 500’s market capitalization including the Magnificent Seven names of Microsoft, Meta, Apple, and Amazon. With over 75% of S&P 500 companies reporting earnings for Q2, the blended earnings growth rate is 11.5%, up from a projected 8.9% coming into earnings season according to FactSet. While these tech giants reported relatively strong growth, expectations were higher as the tech-heavy Nasdaq fell into correction territory at the end of the week.

10-Year Treasury Yield

With the shifting outlook on interest rates, treasury yields fell sharply last week. The 10-year treasury yield fell to 3.80%, the lowest level in eight months. The 2-year treasury yield also fell severely down to 3.88%, leaving the yield curve inversion at a narrow 0.08%. The 2-year treasury yield has been higher than the 10-year yield going back to July 2022.

Looking Forward

Going into the new week, the market sell-off looks to continue as the S&P 500 opened trading more than 3% below its closing price on Friday. The selloff is affecting global markets with US recession concerns seemingly fueling the downward momentum following last week’s jobs report. Japan’s Nikkei 225 fell 12.4% for the day as it was their first trading day since the US jobs report and following the Bank of Japan’s decision to raise their benchmark rate due to concerns around their currency. With the Bank of England cutting their key interest rate for the first time in four years, investors worry that the Fed is behind in doing so to reinforce the economy against the looming slowdown. While the S&P 500 was down from its peak in mid-July by over 5% on Friday and now down near 8% during trading on Monday, we want to remind you that pullbacks are common. Dating back to 1928, the S&P 500 has experienced three 5%+ pullbacks on average per year. The average drawdown per year has been around -16%, however, the average yearly return is closer to 10%. While we continue to monitor the economic landscape, it is helpful to put into perspective the current market trend relative to history.

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.